Dynamic Revenue Maximization: A Continuous Time Approach

48 Pages Posted: 27 May 2015

See all articles by Dirk Bergemann

Dirk Bergemann

Yale University - Cowles Foundation - Department of Economics; Yale University - Cowles Foundation

Philipp Strack

University of California, Berkeley - Department of Economics

Multiple version iconThere are 4 versions of this paper

Date Written: May 22, 2015

Abstract

We characterize the revenue-maximizing mechanism for time separable allocation problems in continuous time. The willingness-to-pay of each agent is private information and changes over time.

We derive the dynamic revenue-maximizing mechanism, analyze its qualitative structure and frequently derive its closed form solution. In the leading example of repeat sales of a good or service, we establish that commonly observed contract features such as at rates, free consumption units and two-part tariffs emerge as part of the optimal contract. We investigate in detail the environments in which the type of each agent follows an arithmetic or geometric Brownian motion or a mean-reverting process. We analyze the allocative distortions and show that depending on the nature of the private information the distortion might increase or decrease over time.

Keywords: Dynamic mechanism design, Repeated sales, Stochastic flow, Flat rates, Two-part Tariffs, Leasing

JEL Classification: D44, D82, D83

Suggested Citation

Bergemann, Dirk and Strack, Philipp, Dynamic Revenue Maximization: A Continuous Time Approach (May 22, 2015). Cowles Foundation Discussion Paper No. 1953R3. Available at SSRN: https://ssrn.com/abstract=2610679 or http://dx.doi.org/10.2139/ssrn.2610679

Dirk Bergemann (Contact Author)

Yale University - Cowles Foundation - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-3592 (Phone)
203-432-2128 (Fax)

HOME PAGE: http://www.econ.yale.edu/~dirk/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Philipp Strack

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://philippstrack.com

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