International College of Economics and Finance

Research seminar by Filippo Balestrieri (Hewlett-Packard): "The Market for Surprises: Selling Substitute Goods through Lotteries"

Thursday, March 11 at 4.30 pm ICEF held Research seminar.
Presenter: Filippo Balestrieri (Hewlett-Packard)
Topic: "The Market for Surprises: Selling Substitute Goods through Lotteries"


Abstract: The online travel market was recently affected by the appearance of new firms, like or, which sell hotel rooms, airplane tickets and car rentals through innovative lottery-like mechanisms. In this paper we examine the use of lotteries over substitute goods under different market structures. We first show that a monopolist that sells two substitute goods uses lotteries over these goods to price discriminate amongst the consumers. We characterize the monopolist's optimal selling mechanism and we show how the probability distributions of the lotteries depend on the buyers' preferences. Then, we examine the case in which each substitute good is produced by an independent firm. Each firm is offered the possibility of also selling its good through lotteries over different firms' products. Lotteries are sold by third party intermediaries whenever more than one firm participates. We determine under which conditions lotteries are sold in equilibrium. In a market with two firms, lotteries are sold if and only if both firms are made better off. With more than two firms this is no longer true: there are equilibria in which firms sell their goods through lotteries even though they end up worse off. In this case, the sale of lotteries can shift surplus from firms to consumers.

Venue: Pokrovsky Boulevard 11, Room Zh-822

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