Selling to the Mean

Abstract

We study optimal selling strategies of a seller who is poorly informed about the buyer's value for the object. When the max-min seller only knows that the mean of the distribution of the buyer's valuations belongs to some interval then nature can keep him to payoff zero no matter how much information the seller has about the mean. However, when the seller has information about the mean and the variance, or the mean and the upper bound of the support, the seller optimally commits to a randomization over prices and obtains a strictly positive payoff. In such a case additional information about the mean and/or the variance affects his payoff.

Keywords: Optimal mechanism design, Robustness, Incentive compatibility, Individual rationality, Ambiguity aversion

JEL Classification: C72, D44, D82