A seller with commitment power sets prices over time. Risk-averse buyers arrive to the market and decide when to purchase. We show that it is optimal for the seller to choose a constant high price punctuated by occasional episodes of sequential discounts that occur at random times. This optimal price-path has the property that the price a buyer ends up paying is independent of his arrival and purchase times, and only depends on his valuation. Our theory accommodates empirical findings on the timing of discounts.

We study the interplay between informational frictions and second-degree price discrimination. Our theory recognizes that consumers differ in their tastes for quality as well as in the information they possess about available offers, which leads to dispersion over price–quality menus in equilibrium. While firms are ex ante identical, we show that their menus are ordered so that more generous menus leave more surplus to consumers of all valuations. We explore the cross-section of equilibrium menus and variations in market conditions to generate empirical predictions on prices, qualities, and markups across firms, and within a firm’s product line. For instance, more competition may raise prices for low-quality goods; yet, consumers are better off, as the qualities they receive also increase. The predictions of our model illuminate empirical findings in many markets, such as those for cell phone plans, yellow-pages advertising, cable TV, and air travel.

We study the interaction between tax advantages for municipal bonds and the market structure of auctions for these bonds. We show that this interaction can limit a bidder’s ability to extract information rents and is a crucial determinant of state and local governments’ borrowing costs. Reduced-form estimates show that increasing the tax advantage by 3 pp lowers mean borrowing costs by 9–10%. We estimate a structural auction model to measure markups and to illustrate and quantify how the interaction between tax policy and bidder strategic behaviour determines the impact of tax advantages on municipal borrowing costs. We use the estimated model to evaluate the efficiency of Obama and Trump administration policies that limit the tax advantage for municipal bonds. Because reductions in the tax advantage inflate bidder markups and depress competition, the resulting increase in municipal borrowing costs more than offsets the tax savings to the government. Finally, we use the model to analyse a recent non-tax regulation that affects entry into municipal bond auctions.