Sequential Screening

pascal courty, london business school
hao li, university of toronto

Abstract

We present a model of price discrimination where a monopolist faces consumers with unitary demands who learn their valuations over time. Consumers are privately informed at the time of contracting about valuation distribution, but they privately learn their actual valuations after contracting. The monopolist sequentially screens consumers with a menu of contracts: they first choose a contract and then choose the level of consumption according to the terms specified in the contract. A deterministic sequential mechanism is a menu of refund contracts, each consisting of an advance payment and a refund amount in case of no consumption, but general sequential mechanisms may also involve randomization. We characterize the optimal sequential mechanism both when some consumers are more eager than others in the sense of first-order stochastic dominance, and when some face greater valuation uncertainty than others in the sense of mean-preserving-spread. We show that it can be optimal to subsidize consumers with smaller valuation uncertainty through low refund in order to reduce the rent to those with greater uncertainty, who purchase more ``flexible'' contracts with greater refund. The size of distortion depends on how informative consumers' initial private knowledge is about their valuations from the monopolist's point of view, but not on the size of valuation uncertainty if it affects all consumers.