nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2023‒02‒27
four papers chosen by
Guillem Roig
University of Melbourne

  1. Opaque Contracts By Andreas Haupt; Zoe Hitzig
  2. Anticompetitive bundling when buyers compete By Taylor, Greg
  3. A duality and free boundary approach to adverse selection By Robert J. McCann; Kelvin Shuangjian Zhang
  4. The Optimality of Constant Mark-Up Pricing By Dirk Bergemann; Tibor Heumann; Stephen Morris

  1. By: Andreas Haupt; Zoe Hitzig
    Abstract: Firms have access to abundant data on market participants. They use these data to target contracts to agents with specific characteristics, and describe these contracts in opaque terms. In response to such practices, recent proposed regulations aim to increase transparency, especially in digital markets. In order to understand when opacity arises in contracting and the potential effects of proposed regulations, we study a moral hazard model in which a risk-neutral principal faces a continuum of weakly risk-averse agents. The agents differ in an observable characteristic that affects the payoff of the principal. In a described contract, the principal sorts the agents into groups, and to each group communicates a distribution of output-contingent payments. Within each group, the realized distribution of payments must be consistent with the communicated contract. A described contract is transparent if the principal communicates the realized contract to the agent ex-ante, and otherwise it is opaque. We provide a geometric characterization of the principal's optimal described contract as well as conditions under which the optimal described mechanism is transparent and opaque. We apply our results to the design and description of driver payment schemes on ride-hailing platforms.
    Date: 2023–01
  2. By: Taylor, Greg
    Abstract: We study the profitability of bundling by an upstream firm who licenses com-plementary technologies to downstream competitors, and who faces a superior competitor for one of its technologies. In an otherwise standard “Chicago-style” model, we show that the existence of downstream competition can make inefficient bundling profitable. Forcing downstream firms to use a less efficient technology can soften competition, thus allowing the upstream firm to extract more profit through the licensing of its monopolized technology. Bundling is more likely to be profitable if downstream competition is intense and if technologies are strongly complementary. The mechanism requires a public commitment to bundling (e.g. technical bundling) and the unobservability of the contracts offered to downstream firms. A similar logic can make it profitable for the upstream firm to degrade the interoperability between its technologies and those of its rivals, even without foreclosing competition.
    Date: 2023–01–31
  3. By: Robert J. McCann; Kelvin Shuangjian Zhang
    Abstract: Adverse selection is a version of the principal-agent problem that includes monopolist nonlinear pricing, where a monopolist with known costs seeks a profit-maximizing price menu facing a population of potential consumers whose preferences are known only in the aggregate. For multidimensional spaces of agents and products, Rochet and Chon\'e (1998) reformulated this problem to a concave maximization over the set of convex functions, by assuming agent preferences combine bilinearity in the product and agent parameters with a quasilinear sensitivity to prices. We characterize solutions to this problem by identifying a dual minimization problem. This duality allows us to reduce the solution of the square example of Rochet-Chon\'e to a novel free boundary problem, giving the first analytical description of an overlooked market segment.
    Date: 2023–01
  4. By: Dirk Bergemann; Tibor Heumann; Stephen Morris
    Abstract: We consider a nonlinear pricing environment with private information. We provide profit guarantees (and associated mechanisms) that the seller can achieve across all possible distributions of willingness to pay of the buyers. With a constant elasticity cost function, constant markup pricing provides the optimal revenue guarantee across all possible distributions of willingness to pay and the lower bound is attained under a Pareto distribution. We characterize how profits and consumer surplus vary with the distribution of values and show that Pareto distributions are extremal. We also provide a revenue guarantee for general cost functions. We establish equivalent results for optimal procurement policies that support maximal surplus guarantees for the buyer given all possible cost distributions of the sellers.
    Date: 2023–01

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