The course begins by studying the optimal pricing problem of a monopoly that faces a continuum of buyers with single-unit demand who are privately informed about their values, which is based on Loertscher and Muir (2022, 2024a). It shows that selling a fixed quantity at the market-clearing price is optimal if and only
if the revenue function at the market-clearing price is concave. Otherwise, the firm optimally uses two prices, inducing excess demand and rationing at the low price. Introducing a tractable model of resale, it then analyzes the effects of resale that emerges when there is rationing. With vertically differentiated
goods, the optimal selling mechanism with non-concave revenue involves conflating different goods into opaquely priced categories. Applied to a procurement setting in which a monopsony hires workers who are privately informed about their costs, this means that the procurement-cost minimizing scheme to hire a given number of workers involves involuntary unemployment and an efficiency wage if the procurementcost function at the market-clearing wage is not convex.
The second part then studies a multi-product monopoly pricing problem in which the firm has horizontally differentiated products on the Hotelling line for sale, assuming that consumers are uniformly distributed, have linear transportation costs, single-unit demand and private information about their locations. From a
formal perspective, the analysis, based on Loertscher and Muir (2024c), performs mechanism design using the toolkit of undergraduate IO. If the placements of the firm’s products are exogenously given, then market-clearing pricing is optimal if and only if the firm prices in the same way as two independent sellers.
If the firm optimally places the products, focusing on market-clearing pricing is never without loss of generality. The optimal selling mechanism involves an opaque product that gives consumers a fifty-fifty chance of obtaining the left or the right good. (Applied to a labor market setting, this means that the
procurement cost minimizing recruitment scheme for an employer with horizontally differentiated jobs involves deliberate inefficient mismatching of workers to jobs; see Loertscher and Muir (2024b).) Resale mitigates but typically does not eliminate the benefits of opaqueness. The analysis has implications for
market definition in antitrust economics and shows that mergers that by traditional tools would be considered neutral can be profitable and increase social surplus while reducing consumer surplus. A Ramsey regulator who aims to maximize a convex combination of the firm’s profit and social surplus can
achieve its objective with appropriately chosen price ceilings, whether or not the firm is free to choose the placement of its products.
The last part of the course revisits the homogeneous good model of the first part and, based on Loertscher and Muir (2024d), analyzes Ramsey regulation for that setting. It introduces the notion of perfect regulation—a set of regulatory instruments is sufficient if, using these instruments, the Ramsey regulator
does as well as it would if it operated the firm itself. It shows that, in general, price ceilings are not sufficient for perfect regulation because, on the margin, the firm may engage in excessive production. Price ceilings, price floors and average price ceilings are, in general, sufficient for perfect regulation. Comparative
statics of the effects of price ceilings and minimum wages, based on Loertscher and Muir (2024b), are also discussed.