CFDP 1953R3

Dynamic Revenue Maximization: A Continuous Time Approach


Publication Date: July 2014

Revision Date: May 2015

Pages: 47


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.


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

JEL Classification Codes:  D44, D82, D83

See CFP: CFP1489