Money for nothing

Abstract

We show that existence of negative externalities among market participants competing for a scarce resource, a setting typical for electronic commerce and internet advertising, allows for emergence of the no-allocation equilibrium with positive revenues for the seller. A monopolist selling K indivisible items to a large number of unit-demand buyers who face negative externalities whenever their rivals get the items, can exploit these negative externalities. If the number of buyers is large enough, the no-allocation equilibrium emerges: no items get allocated, yet buyers still pay the seller to avoid a potential exposure to negative externalities. We provide conditions on the magnitude of externalities and on the level of buyer competition that yield optimality of the no-allocation equilibrium.