Allocating Positional Goods: A Mechanism Design Approach

Abstract: I study the optimal allocation of positional goods in the presence of externalities arising from consumers' concerns for relative consumption. Using a mechanism design approach, I characterize the externalities by a feasibility condition. I show that the revenue-maximizing mechanism possibly excludes some buyers and fully separates the participants if their type distribution satisfies Myerson's regularity. The seller can guarantee at least half the maximum revenue by offering a single level of positional goods. When there is no exclusion, as the seller offers more positional good levels, the consumer surplus decreases (increases) if the distribution has an increasing (decreasing) failure rate. Higher participation increases the consumer surplus under increasing failure rates. Applications include luxury goods, priority services, education, and organizational hierarchies.