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.