A Simple Mechanism for a Budget-Constrained Buyer

Abstract

We study a classic Bayesian mechanism design setting of monopoly problem for an additive buyer in the presence of budgets. In this setting, a monopolist seller with m heterogeneous items faces a single buyer and seeks to maximize her revenue. The buyer has a budget and additive valuations drawn independently for each item from (non-identical) distributions. We show that when the buyer’s budget is publicly known, it is better to sell each item separately; selling the grand bundle extracts a constant fraction of the optimal revenue. When the budget is private, we consider a standard Bayesian setting where buyer’s budget b is drawn from a known distribution B . We show that if b is independent of the valuations (which is necessary) and distribution B satisfies monotone hazard rate condition, then selling items separately or in a grand bundle is still approximately optimal.