Econ 487 Jacob LaRiviere Some content from Brian Quistorff and Justin Rao Lecture 2 Multiple Prices, Econometrics & Modeling Demand Curves Sonia Jaffe
Agenda • Bargaining with perfect information • Bargaining with uncertainty • Single price vs. Segmentation • Value-based pricing for segmentation • Direct price discrimination 2
Bargaining with complete information My value for a good: Your cost of service for that good: We both know all this • P=10 P=0 P=20 Bargaining region Seller walks away Buyer walks away 3
Bargaining and outside options My value for a good: Your cost of service for that good: Competitor’s good gives surplus of 5 • P=10 P=0 P=20 Bargaining region Seller walks away Competitor gets sale 4
What price will be set? Economic theory says if both sides know each other’s values and costs, some deal will be made. It does not say what price will be set. Bargaining power: factors that determine how much of the surplus each side gets from a transaction. P=10 P=0 P=20 Bargaining region Seller walks away Buyer walks away 5
Threat points in bargaining “threat points”: the outcomes if one party walks away • If my threat point is bad, bargaining breakdown is very bad for me. • What is my outside option if we don’t make a deal? Ex. A factory negotiating with employees over wages. • Each employee’s threat point is to quit, which may lead to financial troubles for them. For the factory, having one less employee is probably not that big a deal. Bargaining “alone”, the factory has most of the bargaining power. • Unions allow workers to bargain together. Now the threat point is to strike, meaning the factory is shut down, at least in the short-run. 6
Bargaining with uncertainty My value for a good: (equal chance of any value 10 to 20) You own the good and value it at: • 5 My value is probably above yours, but maybe not 15 10 20 Myerson Satterthwaite Theorem: there is no mechanism that guarantees a transaction will be made when > Idea: the seller doesn’t know the buyers valuation, wants to increase price and may in advertently price buyer out of market. Buyer has no credible way of conveying they have a low value 7
Why can’t we overcome Myerson- Satterthwaite? Trusted intermediary : we both tell a third party our true values, if buyer’s value exceeds sellers, then price is set as halfway between the two values. • E.g. I say 15, you say 10 price = 12.5 • Problem: we both do not have an incentive to be fully truthful. You want to lie a bit to increase price, I want to lie a bit to reduce price Repeated play: we both agree to always be honest with each other and “split the surplus” each “round” of play. • Will only work if we know the distributions of each other’s values. Idea, if the buyer is really uniformly U(10,20), then there should be an equal number of 20’s as 10’s, etc.
You've reached the end of your free preview.
Want to read all 67 pages?