Optimal Contracting Of New Experience Goods

Deb, Rahul (2008): Optimal Contracting Of New Experience Goods.

Abstract

We model new experience goods in the context of dynamic mechanism design. These are goods for which an agent is unsure of her valuation but can learn it through consumption experience. We consider a dynamic environment with a single buyer and seller in which contracting occurs over T periods, where each time the agent consumes the object, she receives a signal which allows her to revise her valuation. In this setting, experimentation with the product is strategic both for the buyer and seller. We derive the efficient and seller optimal contracts and compare them. We present a simple two period example which highlights some of the key features of the model. Finally, the methodology developed in the paper can be used to design efficient and optimal contracts in a multi-buyer setting with learning, where each buyer has single unit demand and there is a single object for sale in each period.

• Item Type: MPRA Paper
• Language: English
• Keywords: Dynamic mechanism design, new experience goods, bandit problems
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D44 - Auctions; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games

References

[1] S. Athey and I. Segal. An efficient dynamic mechanism. Working Paper, 2007.

[2] D. Baron and D. Besanko. Regulation and information in a continuing relationship. Information Economics and Policy, 1984.

[3] M. Battaglini. Long-term contracting with markovian consumers. American Economic Review, 95:637-658, 2005.

[4] D. Bergemann and J. Valimaki. Bandit problems. Cowles Foundation Discussion Paper, 2006.

[5] D. Bergemann and J. Valimaki. Dynamic marginal contribution mechanism. Cowles Foundation Discussion Paper, 2007.

[6] T. Borgers, I. Cox, M. Pesendorfer, and V. Petricek. Equilibrium bids in sponsored search auctions: Theory and evidence. Working Paper, 2007.

[7] P. Courty and H. Li. Sequential screening. Review of Economic Studies, 2000.

[8] B. Edelman, M. Ostrovsky, and M. Schwarz. Internet advertising and the generalized second-price auction: Selling billions of dollars worth of keywords. American Economic Review, 97:242-259, 2007.

[9] P. Eso and B. Szentes. Optimal information disclosure in auctions and the handicap auction. Review of Economic Studies, 74:705-731, 2007.

[10] R. Myerson. Optimal auction design. Mathematics of Operations Research, 1981.

[11] H. Nazerzadeh, A. Saberi, and R. Vohra. Dynamic cost-per-action mechanisms and applications to online adver- tising. Working Paper, 2007.

[12] A. Pavan. Long-term contracting in a changing world. Working Paper, 2007.

[13] A. Pavan, I. Segal, and J. Toikka. Dynamic mechanism design: Revenue equivalence, prot maximization, and information disclosure. Working Paper, 2008.

[14] H. Varian. Position auctions. International Journal of Industrial Organization, 25:1163-1178, 2007.