Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 21

Pelican Point Financial Group's clientele consists of two types of investors. The first type of investor makes many transactions in a given year and has a net worth of over $1.5 million. These investors seek unlimited access to investment consultants and are willing to pay up to $20,000 annually for no-fee-based transactions, or alternatively, $40 per trade. The other type of investor also has a net worth of over $1.5 million but makes few transactions each year and therefore is willing to pay $120 per trade. As the manager of Pelican Point Financial Group, you are unable to determine whether any given individual is a high- or low-volume transaction investor. Design a self-selection mechanism that permits you to identify each type of investor.