Dual Pricing in a Model of Sales
Robust search: How to learn from the past without priors?
Consumer Search and Capacity Constraints
We consider an information design problem when the sender faces ambiguity regarding the probability distribution over the states of the world, the utility function and the prior of the receiver. The solution concept is minimax loss (regret), that is, the sender minimizes the distance from the full information benchmark in the worst-case scenario. In the binary states and binary actions setting the mechanism contains a continuum of messages, and admits a representation as a randomization over two-message mechanisms. A small level of uncertainty
makes the sender more truthful than under full information, but larger uncertainty may result in sender lying more often. If the sender either knows the probability distribution over the states of the world, or knows that the receiver knows it, then the maximal loss is bounded from above by 1/e. When admissible mechanisms are limited to cut-off strategies, this result generalizes to a multiple state model.
Biased recommendations arise naturally in a market with heterogeneous consumers: a seller offers a product to a mix of consumers who can purchase through an intermediary or directly from a seller. ''Picky'' consumers are uncertain about match quality, which they observe only after purchase, while ''flexible'' consumers are always happy with the match. Therefore, picky consumers rely on the intermediary's recommendation. We provide conditions under which the intermediary will recommend a welfare-reducing bad match with positive probability, resulting in inflated recommendations. Regulatory interventions may lead to higher social welfare. However, a regulatory intervention that prohibits recommending bad matches may backfire.
Many benchmarks in over-the-counter markets, such as LIBOR, are formed based on the submission of banks' interbank interest rates. Benchmarks are important, as they help consumers to search and provide firms with a basis for price setting. This paper explores firms' incentives to contribute information about their costs for the purpose of benchmark formation. We show that benchmarks reduce price variance and lead consumers to search less. As a result, firms charge higher prices and consumers end up buying from less efficient firms, which negatively affects total welfare. We find that in order to deter consumer search, firms find it optimal to share their private costs if the search friction is sufficiently high. Moreover, the reduction of search in these markets can dramatically decrease welfare even when consumers are not aware of the content of information exchange, but observe that it took place.
A seller serving two generations of short lived heterogeneous consumers sells a product under uncertain demand. We characterize the seller's optimal pricing, taking into account that the current period's price affects the information transmission to the next period consumers via consumer ratings. While the seller always prefers to generate more information, it is not necessarily in the consumers' interest. We characterize situations in which consumer surplus and welfare are decreasing in additional information. We provide conditions under which aggregate consumer surplus and welfare are lower with than without a rating system.