Optimal Market Composition In Monopoly Screening
TLDR
This paper analyzes how an upstream actor can optimize market composition in a monopoly screening model to balance consumer surplus and profit.
Key contributions
- Characterizes optimal market composition and the efficient frontier of consumer surplus and profit.
- If profit weight >= consumer surplus, optimal market collapses to the top buyer type.
- If consumer surplus weight > profit, optimal market has no exclusion, no interior bunching, and positive mass at highest valuation.
- As consumer surplus weight rises, the market becomes more heterogeneous, consumer surplus rises, profit falls, and total surplus declines.
Why it matters
This paper provides insights into how market composition, rather than direct menu control, can be used by institutions to influence market outcomes. It offers a framework for understanding the trade-offs between consumer welfare and firm profits in regulated markets. The findings are crucial for policymakers designing market structures.
Original Abstract
Economic institutions often influence market outcomes not by directly controlling sellers' menus, but by shaping the market composition sellers face. We study this problem in the canonical monopoly screening model. An upstream actor chooses the distribution of buyer valuations, after which a monopolist offers the optimal quality-price menu. We characterize the optimal market composition and the efficient frontier of consumer surplus and profit. If the upstream actor places at least as much weight on profits as on consumer surplus, the optimal market collapses to the top type. If the weight on consumer surplus is larger than the weight on profits, the optimal market exhibits no exclusion, no interior bunching, and a positive mass at the highest valuation. Under a mild curvature condition, the optimum is unique. As the weight on consumer surplus rises, the optimal market becomes more heterogeneous and less concentrated at the top: the interior expands while the top segment shrinks. Consumer surplus rises, profit falls, and total surplus declines.
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