On the strategic use of risk and undesirable goods in multidimensional screening

TL;DR

This paper explores how monopolists can profitably use undesirable goods to screen consumers based on their risk preferences, showing that such strategies can outperform consumer aversion effects.

Contribution

It provides a theoretical analysis of the conditions under which using undesirable goods enhances profitability in multidimensional screening models.

Findings

Undesirable goods can be profitable depending on agent type and aversion correlation.

Screening effects can outweigh consumer aversion in certain multidimensional settings.

The analysis covers both one-dimensional and multidimensional cases.

Abstract

A monopolist sells goods with possibly a characteristic consumers dislike (for instance, he sells random goods to risk averse agents), which does not affect the production costs. We investigate the question whether using undesirable goods is profitable to the seller. We prove that in general this may be the case, depending on the correlation between agents types and aversion. This is due to screening effects that outperform this aversion. We analyze, in a continuous framework, both 1D and multidimensional cases.