Mechanism design with a liquidity constrained buyer: The 2 x 2 case

This paper studies the implications of buyers' liquidity constraints for th e optimal selling strategy. The possibility that a buyer faces a binding li quidity constraint affects the seller's strategy in a nontrivial way. Speci fically, when a seller has one unit of a good to sell to a buyer with a qua silinear utility function, the 'no-haggling' result indicates that textbook monopoly pricing is optimal, absent liquidity constraints. Introducing a p otentially binding liquidity constraint vitiates the no-haggling result, an d can make it strictly beneficial for the seller to use nonlinear pricing, to commit to a declining price sequence, or to require the buyer to post a cash bond. (C) 1999 Elsevier Science B.V. All rights reserved.