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Brown Bag Seminar

Wednesday July 30, 2014


12:00PM - 1:00PM



Sasa Pekec
The Fuqua School of Business
Duke University


Revenue maximization in the presence of allocative externalities

A revenue-maximizing monopolist is selling items to competing unit-demand buyers. A buyer's private value depends on whether any of the rivals obtains an item or not. We first discuss allocation and pricing when buyers place a premium on obtaining the item exclusively, i.e., if no competitors obtain the item at the same time. We show that if the seller is limited to offering posted price contracts, the price should be inflated in order to capture the value buyers put on exclusivity. However, posted prices are not revenue-maximizing and we present an easy-to-implement hybrid auction-pricing procedure which revenue-dominates posted prices. We also discuss the suboptimality of this (and any other realistically implementable) procedure by introducing the notion of local exclusivity on a network and relating the problem to computational complexity results from theoretical computer science. In the second part of the talk, we analyze revenue implications of the network structure that represents rivalry among buyers. We consider a setting in which a single indivisible item is allocated and a buyer faces a loss if a rival buyer obtains it. In such setting, too much competition among rivals could harm monopolist's revenues. Specifically, a market with a fragmented network structure yields higher revenues for the monopolist than a market with a fully connected network structure. Interestingly, asymmetric competitive relationships among buyers have higher revenue potential for the monopolist than symmetric ones.

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Alessandro Arlotto

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