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Informed Seller in a Hotelling Market

55 Pages Posted: 20 Feb 2014 Last revised: 2 Feb 2016

Filippo Balestrieri

Hewlett-Packard Laboratories

Sergei Izmalkov

New Economic School

Date Written: January 30, 2016

Abstract

We derive the optimal selling mechanism for a monopolist who is privately informed about the attributes of a horizontally differentiated good. To do so, we set up an informed principal problem in a Hotelling model where the buyer's preferences are described in terms of a base consumption value and the distance between the buyer's and the seller's locations. To represent different kinds of markets we consider linear, concave, and convex distance costs. We derive the optimal mechanism and offer ways to implement it. For instance, for low (high) base consumption values, it is optimal for the seller to disclose (do not disclose) her type and then set the optimal price. For intermediate values, the optimal mechanism may involve stochastic delivery and can be implemented by multi-item menus that involve selling information or refund options. Under linear distance costs, offering the following two-item menu is optimal: a good with undisclosed attributes (opaque good) or an option to learn information and buy the good later. Under convex and concave costs, the optimal mechanism may involve type-specific probabilistic allocations, which can also be implemented through private transmission of different information to different buyer types.

Keywords: informed principal, information discrimination, horizontal differentiation, lotteries, optimal mechanism

JEL Classification: C72, D21, D42, D47, D82, D83, L12, L15

Suggested Citation

Balestrieri, Filippo and Izmalkov, Sergei, Informed Seller in a Hotelling Market (January 30, 2016). Available at SSRN: https://ssrn.com/abstract=2398258 or http://dx.doi.org/10.2139/ssrn.2398258

Filippo Balestrieri

Hewlett-Packard Laboratories ( email )

1501 Page Mill Road
Palo Alto, CA 94304
United States

Sergei Izmalkov (Contact Author)

New Economic School ( email )

47 Nakhimovsky Prospekt
Moscow, 117418
Russia

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