Profiling and Endogenous Valuation

We study a monopolist facing a buyer whose valuation is determined by pre-trade investment.

Before setting price, the seller observes a signal about the buyer's private investment cost (buyer profiling).

Information that helps the seller extract surplus can also undermine the buyer's incentive to create it.

We characterize the buyer-seller payoffs attainable across all possible profiling.

On the Pareto frontier, if investment increases, hold-up risk always raises the payoff that the seller captures faster than the surplus that the investment creates.

Protecting buyer welfare therefore requires discouraging investment, even though investment is socially efficient.