Speaker: Suren Basov
Affiliation: La Trobe University
Title: The Inclusiveness of Exclusion
Date: Tuesday, 22 Jun 2010
Time: 3:00 pm
Location: Room 401
Consider a monopolist who produces a good of quality x to sell to consumers.
A consumer’s utility from consuming the good is given by u(a, x) – t, where a is
a parameter, which is privately known to the consumer, x is the quality of the
good purchased, and t is the price paid. The monopolist does not observe a,
but knows the distribution of a in the population of the consumers and chooses
tariff t(x) to maximize her profits. Early models assumed that a belongs either
to a finite set or a one-dimensional continuum. Under these assumptions it was
shown that the monopolist may sometimes choose not to serve some fraction of
consumers in equilibrium, even when there is positive surplus associated with
those consumers. This phenomenon is known as exclusion. However, whether the
exclusion occurs in early models depended on the distribution of types and both
cases exclusion and full coverage were robust with respect to small perturbations of
the model. In a multidimensional screening models a is assumed to be distributed
over a set of dimension greater than one. One of the most celebrated results in the
theory of multidimensional screening comes from Armstrong (1996) where he shows
that under some technical assumptions exclusion always occur in such models.
Though important, Armstrong’s result relies on strong technical assumptions on
both preferences and market structure, which made it hard to apply to many
interesting practical questions. We extend Armstrong’s result on exclusion
in multi-dimensional screening models in two key ways, providing support for the
view that this result is quite generic and applicable to many different markets.
First, we relax the strong technical assumptions he imposed on preferences and
consumer types. Second, we extend the result beyond the monopolistic market
structure to generalized oligopoly settings with entry. We also analyze applications
to several quite different settings: credit markets, automobile industry, research
grants, the regulation of a monopolist with unknown demand and cost functions,
and involuntary unemployment in the labor market.