Screening by mode of trade

Juan Beccuti,Marc Möller

doi:10.1016/j.geb.2021.06.010

Abstract

This paper endogenizes a monopolist's choice between selling and renting in a non-anonymous durable goods setting with short-term commitment, by allowing for contracts that determine the good's allocation not only at the beginning but also at the end of a given period. We show that the revenue-maximizing menu of contracts features screening by mode of trade when future trade is subject to frictions and the monopolist is more patient than consumers. Selling to high types while renting to low types, allows the monopolist to defer part of his compensation in form of a reduction of consumers' future information rents while lowering the allocational costs of ordinary, intertemporal screening.

Highlights

The loss of market power resulting from a monopolist’s inability to commit to future terms of trade, has been a dominant theme of the durable goods literature, covering both, selling frameworks (Coase, 1972) and renting frameworks (Hart and Tirole, 1988)
The main objective of this article is to investigate the conditions under which screening by mode of trade, i.e. selling to some consumers while renting to others, can improve screening in a durable goods monopoly
With the emergence of e-commerce, the marketing of electronic content such as e-books, movies, or songs, both as streaming- and download-versions has become common practice. Alternative reasons such as limited budgets or preference uncertainty may motivate the supply of a rental option, the analysis of its effect on the persistence of informational asymmetries is a crucial element for our understanding of the determinants of market power in durable goods markets

Summary

Introduction

The loss of market power resulting from a monopolist’s inability to commit to future terms of trade, has been a dominant theme of the durable goods literature, covering both, selling frameworks (Coase, 1972) and renting frameworks (Hart and Tirole, 1988). We use Perfect Bayesian Equilibrium (PBE) as solution concept which requires that for any choice of mechanism (M, c), the consumer’s communication strategy q maximizes his expected payoff, the supplier updates his belief about the consumer’s type βbased on Bayes rule whenever feasible, and the supplier’s price offer p maximizes his expected second period revenue β R H (p) + (1 − β)R L (p) given his updated belief. The following lemma shows that, within the set of so called “incentive efficient mechanisms,” inducing Paretoefficient payoffs, there is no loss of generality in restricting attention to a simple class of “direct” mechanisms, in which the consumer chooses from a menu consisting of only two contracts and reveals his true type with positive probability. It is in this sense that our approach extends the existing renting or selling models

Benchmark: long-term contracts

Short-term contracting: the supplier’s problem

Restriction to a homogeneous mode of trade

The optimal menu of short-term contracts

Price-posting

Tough supplier

Continuum of types

Conclusion