Conferences at Department of Economics, University of Toronto, Canadian Economic Theory Conference 2015

Font Size:  Small  Medium  Large

Mechanism Design by an Informed Seller

Xin Zhao*

Date: 2015-05-10 8:30 am – 9:00 am
Last modified: 2015-05-04

Abstract


This paper studies the design of a selling mechanism by a privately informed seller of an indivisible object, whose private information directly affects the the buyers' valuations on the object. The analysis focuses on safe mechanisms (Myerson, 1983) which are incentive compatible and individually rational for all the players, regardless of the buyers' beliefs about the seller's type. Among this class of mechanisms, we characterize the Rothschild-Stiglitz-Wilson (RSW) mechanism (Maskin and Tirole, 1992) which maximizes the revenue of each type of the seller. The RSW mechanism only differs in reserve prices from the revenue-maximizing mechanism where the seller's information is public. Specifically, the lowest type of the seller has the same reverve prices in the two mehcanisms, while all other types of the seller set higher reserve prices in the RSW mechansim. This result indicates that for an informed seller, the reverse price is the least costly device of signaling. The paper also shows that the RSW mechanism can be supported as the the seller's equilibrium strategy in the seller-optimal separating equilibrium of the mechanism-selection game where the inscrutability principle (Myerson, 1983) does not apply.

Full Text: PDF