Mechanism Design with Limited Information: The Case of Nonlinear Pricing
13 Pages Posted: 30 Nov 2010
Date Written: November 30, 2010
We analyze the canonical nonlinear pricing model with limited information. A seller offers a menu with a finite number of choices to a continuum of buyers with a continuum of possible valuations. By revealing an underlying connection to quantization theory, we derive the optimal finite menu for the socially efficient and the revenue-maximizing mechanism. In both cases, we provide an estimate of the loss resulting from the usage of a finite n-class menu. We show that the losses converge to zero at a rate proportional to 1/n^2 as n becomes large.
Keywords: Mechanism design, Limited information, Nonlinear pricing, Quantization, Lloyd-max optimality
JEL Classification: D82, D83, D86
Suggested Citation: Suggested Citation