CITRIS Research Exchange - Economics of Information Structure: Timing the Sale when Buyers have Uncertain Product Valuations

October 31, 2007: 12:00pm - 1:00pm
Location: 290 Hearst Memorial Mining Building, the Maria & Dado Banatao Conference Room, UC Berkeley

Hemant Bhargava, Professor of Management and Computer Science, UC Davis

Part of the CITRIS Research Exchange at UC Berkeley. The complete schedule for the fall semester is online at RE-Fall2007. Sponsored by Infineon Technologies.

Abstract:

Many products are traded in an environment where customers are uncertain, in advance of the consumption period, of their future valuations for the product. Electronic ticketing, smart cards, online retailing and other technologies enable firms to sell their products far in advance of consumption. Over time customers get better informed, privately, about their true valuations, so that a firm can influence the information structure of the contract through its decision on timing of the sale. A firm that offers late selling suffers an information disadvantage relative to one that sells in advance of consumption. We demonstrate that despite this information disadvantage, late selling can benefit the firm when customers are heterogeneous and have substantial uncertainty. We extend this analysis to cover products for which customers have multi-unit demand, such as f

or IT and telecommunications services. This extension uncovers the same pattern: delayed selling---or ex-post pricing---can better exploit customer heterogeneities for price discrimination, thereby outperforming ex-ante or advance selling when customers are sufficiently uncertain. We study two-part tariffs and three-part tariffs, which are commonly used price discrimination tools for IT and telecoms products, and find that the choice of tariff structure influences the relative superiority of advance vs late selling. We also establish the price discriminating benefits of three-part tariffs: we show that a lean menu of three-part tariffs--- one with as few as a single item---can generally outperform longer menus of two-part tariffs, and often do so while requiring far less detailed information about consumer preferences.