Does a Monopoly Need to Exclude?

Duke/UNC Micro-Theory Working Papers Series No. 18

46 Pages Posted: 2 Sep 2003

See all articles by Sergei Severinov

Sergei Severinov

Duke University, Fuqua School of Business-Economics Group

Raymond J. Deneckere

University of Wisconsin - Madison - Department of Economics

Date Written: May 16, 2003

Abstract

We examine the optimal selling strategy of a monopolist facing consumers who have privately known demands, and some of whom have limited abilities to misrepresent their preferences. We derive the optimal mechanism in this environment and characterize its properties. In particular, we show that communication with consumers plays a significant role in the process of screening. Consumers who have better abilities to misrepresent information benefit from the presence of consumers who lack such abilities. Whenever the fraction of the latter group of consumers is positive, there is no exclusion: It is optimal for the firm to supply a positive quantity of the good to all consumers whose valuations exceeds the marginal cost of production. Our analysis reflects the view that the environments where individuals can costlessly and effortlessly manipulate and misrepresent their private information, although standard in economics, represent an extreme point in the spectrum of various possibilities. In fact, available evidence suggests that at least some individuals have limited abilities to misrepresent their true types and imitate others' behavior.

Keywords: Mechanism design, screening, honesty, bounded rationality

JEL Classification: C72, D82

Suggested Citation

Severinov, Sergei and Deneckere, Raymond, Does a Monopoly Need to Exclude? (May 16, 2003). Duke/UNC Micro-Theory Working Papers Series No. 18, Available at SSRN: https://ssrn.com/abstract=419960 or http://dx.doi.org/10.2139/ssrn.419960

Sergei Severinov (Contact Author)

Duke University, Fuqua School of Business-Economics Group ( email )

Box 90097
Durham, NC 27708-0097
United States
919-660-7926 (Phone)
919-660-7971 (Fax)

Raymond Deneckere

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States
608-263-6724 (Phone)
608-263-3876 (Fax)

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