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PS4_econ201b

The document presents Problem Set #4 for Economics 201b, focusing on second-degree price discrimination and mechanisms in economics. It includes questions on monopolist pricing, quantity discounts, and a discrete number of types, along with conditions for implementability and utility maximization. The problem set requires analysis of various economic principles and proofs related to pricing strategies and consumer types.

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2 views

PS4_econ201b

The document presents Problem Set #4 for Economics 201b, focusing on second-degree price discrimination and mechanisms in economics. It includes questions on monopolist pricing, quantity discounts, and a discrete number of types, along with conditions for implementability and utility maximization. The problem set requires analysis of various economic principles and proofs related to pricing strategies and consumer types.

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zqfstbkgdt
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Problem Set #4

Economics 201b

1. Consider the following second-degree pricing problem. A monopolist faces


a continuum of consumers. Let θ denote type. Assume θ ∈ [θ0 , θ1 ] ⊂ R.
Assume that
c
θ0 > ,
k
where c is the constant marginal cost of production and k is a parameter
of inverse demand. Specifically, assume a type-θ’s inverse demand is
p(x, θ) = θ × (k − x) .
Assume θ is distributed according to the differentiable distribution func-
tion F (·). Let f (·) denote the associated density function (i.e., f (θ) =
F  (θ)). Assume f (θ) > 0 for all θ ∈ [θ0 , θ1 ].
(a) Let x̂(θ) denote the solution, under the assumptions of this problem,
to equation (12) from the “Second-degree Price Discrimination with
a Continuum of Types” handout. What is x̂(θ)?
(b) What difficulty would emerge if, under the assumptions of this prob-
lem,  
d 1 − F (θ)
dθ f (θ)
were greater than 1 for some values of θ?
(c) Let F (·) be the uniform distribution. What is the optimal second-
degree price discrimination scheme?
2. Set up a price-discrimination scheme via quantity discounts as a mechanism-
design problem satisfying the assumptions of the standard framework,
including the assumptions of Proposition 9 in “Lecture Notes for Eco-
nomics.”
3. Consider the following variant of the standard framework in which there
are a discrete number of types, N . Let n ∈ {1, . . . , N } denote a type.
Let the probability of the agent being type n be denoted by fn . Assume
fn > 0 for all n.
(a) Why is this last assumption without loss of generality?
n
Define Fn = m=1 fm . The principal’s utility is b(x, n) − s and the
agent’s is s − φ(x, n), where x ∈ R+ is the allocation. Let V (x, n) =
b(x, n) − φ(x, n). The agent’s reservation utility is 0. Assume V (·, n) is
strictly quasi-concave for all n. Assume φ(0, n) = 0 for all n. Define
Rn (x) ≡ φ(x, n) − φ(x, n + 1).

Copyright 2005
c Benjamin E. Hermalin. All rights reserved.
Problem Set #4

(b) What is Rn (·)?


Finally, assume:
Screening Condition (sc): For all n ∈ {1, 2, . . . , N −1}, Rn (·)
is strictly increasing and convex. Moreover, Rn (x) > 0 for all
x > 0.

(c) How does the Screening Condition relate to the Spence-Mirrlees con-
dition?
(d) Prove the following proposition: Under the assumptions given, an
allocation profile (x1 , . . . , xN ) is implementable if and only if xn is
non-decreasing in type n. Moreover, the optimal mechanism for the
principal solves
N  
1 − Fn
max fn V (xn , n) − Rn (xn )
{x1 ,...,xN }
n=1
fn

subject to the constraint that x1 ≤ · · · ≤ xN .


[Hint: It is advisable to proceed as follows:
i. First, establish the necessity of a non-decreasing allocation pro-
file using a revealed-preference argument.
ii. Next, define the adjacent incentive compatibility constraints as,
for all n ≤ N − 1,
un ≥ un+1 − Rn (xn+1 )
un+1 ≥ un + Rn (xn ) ,
where un is type n’s equilibrium utility level (i.e., un = sn −
φ(xn , n)). Show that if the adjacent ic constraints hold and the
allocation profile is non-decreasing, then all the ic constraints
hold.
iii. Establish that a non-decreasing allocation profile is sufficient
(i.e., implementable) by considering the contract in which u1 = 0
and un = un−1 + Rn−1 (xn−1 ) for n > 1. Recall, given the pre-
ceding step, that you need only check adjacent ic constraints.
iv. Finally, show the principal’s problem is
N

max fn (V (xn , n) − un ) (P)
{u,x}
n=1

(where u = (u1 , . . . , uN ) and x = (x1 , . . . , xN )) subject to

un ≥ 0 ∀n (IR)
un ≥ uj + φ(xj , j) − φ(xj , n) ∀n, j (IC)
and, then, show that’s equivalent to what you are to show.]

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