CFDP 1953R3

Dynamic Revenue Maximization: A Continuous Time Approach

Author(s): 

Publication Date: July 2014

Revision Date: May 2015

Pages: 47

Abstract: 

We characterize the revenue-maximizing mechanism for time separable allocation problems in continuous time. The willingness-to-pay of each agent is private information and changes over time.

We derive the dynamic revenue-maximizing mechanism, analyze its qualitative structure and frequently derive its closed form solution. In the leading example of repeat sales of a good or service, we establish that commonly observed contract features such as at rates, free consumption units and two-part tariffs emerge as part of the optimal contract. We investigate in detail the environments in which the type of each agent follows an arithmetic or geometric Brownian motion or a mean-reverting process. We analyze the allocative distortions and show that depending on the nature of the private information the distortion might increase or decrease over time.

Keywords: 

Dynamic mechanism design, Repeated sales, Stochastic flow, Flat rates, Two-part Tariffs, Leasing

JEL Classification Codes:  D44, D82, D83

See CFP: CFP1489