CFDP 2189R

Progressive Participation

Author(s): 

Publication Date: August 2019

Revision Date: January 2020

Pages: 43

Abstract: 

A single seller faces a sequence of buyers with unit demand. The buyers are forward-looking and long-lived but vanish (and are replaced) at a constant rate. The arrival time and the valuation is private information of each buyer and unobservable to the seller. Any incentive compatible mechanism has to induce truth-telling about the arrival time and the evolution of the valuation. 
 
We derive the optimal stationary mechanism, characterize its qualitative structure, and derive a closed-form solution. As the arrival time is private information, the buyer can choose the time at which he reports his arrival. The truth-telling constraint regarding the arrival time can be represented as an optimal stopping problem. The stopping time determines the time at which the buyer decides to participate in the mechanism. The resulting value function of each buyer cannot be too convex and must be continuously differentiable everywhere, reflecting the option value of delaying participation. The optimal mechanism thus induces progressive participation by each buyer: he participates either immediately or at a future random time.

Keywords: 

Dynamic Mechanism Design, Observable Arrival, Unobservable Arrival, Repeated Sales, Interim Incentive Constraints, Interim Participation Constraints, Stopping Problem, Option Value, Progressive Participation

JEL Classification Codes: D44, D82, D83

JEL Classification Codes: D44D82D83

See CFDP Version(s): CFDP 2189