Optimal Mechanism Design with Speculation and Resale∗

In this paper, we examine the optimal mechanism design problem of selling an indivisible object to one regular buyer and one speculator, where inter-buyer resale cannot be prohibited. The resale market is modeled as a stochastic ultimatum bargaining game between the two buyers. We fully characterize the optimal mechanism under general conditions. Surprisingly, in the optimal mechanism, the seller never allocates the object to the regular buyer regardless of his bargaining power in the resale market. The seller sells only to the speculator, and reveals no additional information to the resale market. The possibility of resale causes the seller to sometimes hold back the object, which under our setup is never optimal if resale is prohibited. We find that the seller’s revenue is increasing in the speculator’s bargaining power in the resale market. When the speculator has full bargaining power, Myerson’s optimal revenue is achieved. When the speculator has no bargaining power, a conditional efficient mechanism prevails. Extension to the case of one speculator and many regular buyers is also discussed.