Two-Dimensional Mechanism Design and Implementability by an Indirect Mechanism

Abstract

This paper studies the problem on two-dimensional mechanism design where the buyer’s taste and budget are his private information. The paper investigates the problem by the method of dimension-reduction, i.e. , by focusing only on the buyer’s budget and constructing an indirect mechanism: function of one variable, the buyer’s budget. It is an approach quite antipodal to that by Kojima [1] where he focused on the buyer’s taste instead of his budget. It is shown that the seller does not lose any money by adopting the indirect mechanism of this paper. In other words, the seller’s revenue-maximizing direct mechanism is implemented by such an indirect mechanism