OPTIMAL PRICING MECHANISMS WHEN EXCLUSIVITY IS VALUABLE

SASA PEKEC

Duke University

Multiple identical items are being sold to unit-demand buyers in a
network. Buyers are willing to pay a premium if they obtain the item
exclusively in their neighborhood, i.e. if no neighbor obtains the item.
Each buyer has a private value for the item, as well as a private value
for obtaining the item exclusively among neighbors. The seller limited to
offering posted prices should inflate the price in order to maximize
revenues and capture the value buyers put on the allocative externalities.
However, we show that these posted price mechanisms are suboptimal by
solving the revenue maximizing mechanism design problem for several
special information structures. We show that this mechanism design problem
could be computationally hard even when the corresponding perfect
information problem is trivial to solve. Furthermore, optimal seller
revenues are non-monotonic in buyers' valuations because information rents
that buyers capture depend not just on the private values, but also on the
underlying network topology. Finally, we present an ascending auction
implementation of the optimal mechanism on the complete graph with private
values that admit a generic one-dimensional representation. Our results
provide insights on when and where exclusive allocations should be
considered, and how to price exclusivity.

BIO

Sasa Pekec is an Associate Professor in the Decision Sciences Area at the
Fuqua School of Business. He holds a Ph.D. in Applied Mathematics from
Rutgers University. He joined Duke in 1998 and is currently teaching the
core statistics course in the daytime MBA and the Cross Continent MBA
programs. Professor Pekec's research is interdisciplinary and revolves
around decision-making in complex competitive environments, and includes
work on multiple object auction design, subset choice and bundle
valuations, preference elicitation, and information aggregation. He has
published articles in Management Science and Operations Research, as well
as in top academic journals in other fields, such as economics,
mathematics, and psychology.
 
His work on combinatorial auctions has been widely cited and has
influenced design of a new generation of now standard procurement auction
procedures in a variety of industries. Professor Pekec's consulting
experience includes banking, internet, pharmaceutical, retail, and
telecommunications industries. He serves on the Supervisory Board of
Atlantic Grupa, one of the leading FMCG companies in SE Europe. Professor
Pekec is a member of the Council of Economic Advisors to the President of
Croatia.