Optimal sales mechanism with outside options

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Article number105279
Journal / PublicationJournal of Economic Theory
Volume195
Online published18 May 2021
Publication statusPublished - Jul 2021

Abstract

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.

Research Area(s)

  • Delay, Option contract, Outside option, Quitting right, Upfront payment