Dynamic Revenue Maximization: A Continuous Time Approach
48 Pages Posted: 27 May 2015
Date Written: May 22, 2015
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: Suggested Citation