Approximately Optimal Mechanism Design for Competing Sellers

TL;DR

This paper studies how competing sellers can design mechanisms to maximize revenue when selling identical products to a single buyer, proposing approximately optimal strategies and analyzing equilibrium limitations.

Contribution

It introduces a simple single-lottery mechanism that guarantees a quarter of the monopolist revenue in a Stackelberg setting and characterizes best responses and limitations in competitive mechanisms.

Findings

A single-lottery mechanism guarantees 25% of monopolist revenue.

Best response mechanisms for the competitor are simple take-it-or-leave-it prices.

No mechanism can guarantee more than 1/e of the monopolist revenue.

Abstract

Two sellers compete to sell identical products to a single buyer. Each seller chooses an arbitrary mechanism, possibly involving lotteries, to sell their product. The utility-maximizing buyer can choose to participate in one or both mechanisms, resolving them in either order. Given a common prior over buyer values, how should the sellers design their mechanisms to maximize their respective revenues? We first consider a Stackelberg setting where one seller (Alice) commits to her mechanism and the other seller (Bob) best-responds. We show how to construct a simple and approximately-optimal single-lottery mechanism for Alice that guarantees her a quarter of the optimal monopolist's revenue, for any regular distribution. Along the way we prove a structural result: for any single-lottery mechanism of Alice, there will always be a best response mechanism for Bob consisting of a single take-it-or-leave-it price. We also show that no mechanism (single-lottery or otherwise) can guarantee Alice more than a 1/e fraction of the monopolist revenue. Finally, we show that our approximation result does not extend to Nash equilibrium: there exist instances in which a monopolist could extract full surplus, but neither competing seller obtains positive revenue at any equilibrium choice of mechanisms.