Dynamic Screening with Limited Commitment

42 Pages Posted: 9 May 2013 Last revised: 11 Sep 2015

See all articles by Rahul Deb

Rahul Deb

University of Toronto

Maher Said

NYU Stern School of Business

Date Written: April 14, 2015

Abstract

We examine a model of dynamic screening and price discrimination in which the seller has limited commitment power. Two cohorts of anonymous, patient, and risk-neutral buyers arrive over two periods. Buyers in the first cohort arrive in period one, are privately informed about the distribution of their values, and then privately learn the value realizations in period two. Buyers in the second cohort are "last-minute shoppers" that already know their values upon their arrival in period two. The seller can fully commit to a long-term contract with buyers in the first cohort, but cannot commit to the future contractual terms that will be offered to second-cohort buyers. The expected second-cohort contract serves as an endogenous type-dependent outside option for first-cohort buyers, reducing the seller's ability to extract rents via sequential contracts. We derive the seller-optimal equilibrium and show that, when the seller cannot condition on future contractual terms (either explicitly or implicitly), she endogenously generates a commitment to maintaining high future prices by manipulating the timing of contracting.

Keywords: Asymmetric information, Dynamic mechanism design, Limited commitment, Recontracting, Sequential screening, Type-dependent participation

JEL Classification: C73, D82, D86

Suggested Citation

Deb, Rahul and Said, Maher, Dynamic Screening with Limited Commitment (April 14, 2015). Journal of Economic Theory, Vol. 159, No. B, 2015, Available at SSRN: https://ssrn.com/abstract=2260554 or http://dx.doi.org/10.2139/ssrn.2260554

Rahul Deb

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

HOME PAGE: http://www.economics.utoronto.ca/debrahul/

Maher Said (Contact Author)

NYU Stern School of Business ( email )

44 West 4th Street
New York, NY 10012
United States

HOME PAGE: http://www.mahersaid.com/

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