Dynamic Mechanism Design for Online Commerce
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4268-02.pdf
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Author(s)
Gallien, Jérémie
Date Issued
April 14, 2003
Series/Report no.
MIT Sloan School of Management Working Paper;4268-02
Abstract
Motivated by electronic commerce, this paper is a mechanism design study for sellers
of multiple identical items. In the market environment we consider, participants are risk
neutral and time-sensitive, with the same discount factor; potential buyers have unit
demand and arrive sequentially according to a renewal process; and valuations are
drawn independently from the same regular distribution. From the Revelation Principle,
we can restrict our attention to direct dynamic mechanisms taking a sequence of
valuations and arrival epochs as a strategic input. We define two properties
(discreteness and stability), and prove that under a regularity assumption on the
inter-arrival time distribution, we may at no cost of generality consider only
mechanisms satisfying them. This effectively reduces the mechanism input to a
sequence of valuations, allowing us to formulate the problem as a dynamic program
(DP). Because this DP is equivalent to a well-known infinite horizon asset-selling
problem, we can finally characterize the optimal mechanism as a sequence of posted
prices increasing with each sale. Our numerical study indicates that, with uniform
valuations, the benefit of dynamic pricing over a fixed posted price may be small.
Besides, posted prices are preferable to online auctions for a large number of items or
high interest rate, but in other cases auctions are close to optimal and significantly more
robust
Subjects
Dynamic Pricing
Fixed Posted Price
Online Auctions
Persistent DSpace Link
