Price discrimination through communication

Abstract

© 2015 Itai Sher and Rakesh Vohra. We study a seller's optimal mechanism for maximizing revenue when a buyer may present evidence relevant to her value. We show that a condition very close to transparency of buyer segments is necessary and sufficient for the optimal mechanism to be deterministic-hence, akin to classic third degree price discrimination-independently of nonevidence characteristics. We also find another sufficient condition depending on both evidence and valuations, whose content is that evidence is hierarchical. When these conditions are violated, the optimal mechanism contains a mixture of second and third degree price discrimination, where the former is implemented via sale of lotteries. We interpret such randomization in terms of the probability of negotiation breakdown in a bargaining protocol whose sequential equilibrium implements the optimal mechanism.