Optimal sales mechanism with outside options

This paper studies the optimal design of sales mechanisms when a buyer can quit a negotiation for an outside option at any time. The main results show that the profit-maximizing mechanism induces a set of buyer types to delay purchasing a good if the value of the outside option is highly dispersed among buyer types. Moreover, to prevent a buyer from quitting a negotiation, the profit-maximizing mechanism also features an upfront payment, which is compensated later by a price discount. The seller can implement the profit-maximizing mechanism by offering a declining price path or a menu of European options.