Optimal mechanisms with simple menus

Abstract

We consider revenue-optimal mechanism design for the case with one buyer and two items. The buyer's valuations towards the two items are independent and additive. In this setting, optimal mechanism is unknown for general valuation distributions. We obtain two categories of structural results that shed light on the optimal mechanisms. These results can be summarized into one conclusion: under certain conditions, the optimal mechanisms have simple menus. The first category of results state that, under a centain condition, the optimal mechanism has a monotone menu. In other words, in the menu that represents the optimal mechanism, as payment increases, the allocation probabilities for both items increase simultaneously. This theorem complements Hart and Reny's recent result regarding the nonmonotonicity of menu and revenue in multi-item settings. Applying this theorem, we derive a version of revenue monotonicity theorem that states stochastically superior distributions yield more revenue. Moreover, our theorem subsumes a previous result regarding sufficient conditions under which bundling is optimal[Hart and Nisan 2012]. The second category of results state that, under certain conditions, the optimal mechanisms have few menu items. Our first result in this category says that, for certain distributions, the optimal menu contains at most 4 items. The condition admits power (including uniform) density functions. Our second result in this category works for a weaker (hence more general) condition, under which the optimal menu contains at most 6 items. This condition is general enough to include a wide variety of density functions, such as exponential functions and any function whose Taylor series coefficients are nonnegative. Our last result in this category works for unit-demand setting. It states that, for uniform distributions, the optimal menu contains at most 5 items. All these results are in sharp contrast to Hart and Nisan's recent result that finite-sized menu cannot guarantee any positive fraction of optimal revenue for correlated valuation distributions.