The Scope of Sequential Screening with Ex-Post Participation Constraints

We study the classic sequential screening problem in the presence of buyers’ ex-post participation constraints. A leading example is the online display advertising market, in which publishers frequently do not use up-front fees and instead use transaction-contingent fees. We establish conditions under which the optimal selling mechanism is static and buyers are not screened with respect to their interim type, or sequential and the buyers are screened with respect to their interim type. In particular, we provide an intuitive necessary and sufficient condition under which the static contract is optimal for general distributions of ex-post values. Further, we completely characterize the optimal sequential contract with binary interim types and continuum of ex-post values when this condition fails. Importantly, the latter contract randomizes the allocation of the low type buyer while giving a deterministic allocation to the high type. We also provide partial results for the case of multiple interim types.