2023/01/18 by Robert J. McCann, McCann, Robert J., Kelvin Shuangjian Zhang +1
Business, Management and Accounting · Economics, Econometrics and Finance · #Consumer Market Behavior and Pricing #Economic theories and models #Economics of Agriculture and Food Markets #FOS: Economics and business #FOS: Mathematics #Optimization and Control (math.OC) #Theoretical Economics (econ.TH)
paper · pdf · doi:10.48550/arxiv.2301.07660
openalex publication_date 2023/01/18 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
Adverse selection is a version of the principal-agent problem that includes monopolist nonlinear pricing, where a monopolist with known costs seeks a profit-maximizing price menu facing a population of potential consumers whose preferences are known only in the aggregate. For multidimensional spaces of agents and products, Rochet and Choné (1998) reformulated this problem to a concave maximization over the set of convex functions, by assuming agent preferences combine bilinearity in the product and agent parameters with a quasilinear sensitivity to prices. We characterize solutions to this problem by identifying a dual minimization problem. This duality allows us to reduce the solution of the square example of Rochet-Choné to a novel free boundary problem, giving the first analytical description of an overlooked market segment.