Pricing Novel Goods

Francesco Giovannoni and Toomas Hinnosaar

Papers from arXiv.org

Abstract: We study a bilateral trade problem where a principal has private information that is revealed with delay, such as a seller who does not yet know her production cost. Postponing the contracting process incurs a costly delay, while early contracting with limited information can create incentive issues, as the principal might misrepresent private information that will be revealed later. We show that the optimal mechanism can effectively address these challenges by leveraging the sequential nature of the problem. The optimal mechanism is a menu of two-part tariffs, where the variable part is determined by the principal's incentives and the fixed part by the agent's incentives. As two-part tariffs might be impractical in some applications, we also study price mechanisms. We show that the optimal price mechanism often entails trade at both the ex-ante and ex-post stages. Dynamic price mechanisms can lower the cost of delay by transacting with high-type agents early and relax the incentive constraints by postponing contracts with lower-type agents. We also generalize our analysis to costly learning and study ex-post efficiency in our context.

Date: 2022-08, Revised 2024-08
New Economics Papers: this item is included in nep-com, nep-cta, nep-des, nep-gth, nep-ind and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2208.04985

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