Optimal Allocation of Exclusivity Contracts

We study optimal allocation and pricing on a network of competing buyers. Buyers have private information about the value of an item being sold (such as franchise contract, good, service). Furthermore, buyers place a premium on obtaining the item exclusively, i.e., if no competitors obtain the item at the same time. We show that the seller limited to offering posted price contracts should inflate the price in order to maximize revenues and capture the value buyers put on exclusivity. However, posted prices are not revenue-maximizing and there are theoretical barriers to discovering generic optimal allocation and pricing schemes, stemming both from mechanism design theory and computational complexity theory. We present an easy-to-implement hybrid auction-pricing procedure which revenue-dominates posted prices and is optimal in a perfect competition setting.