Definition of Mechanism Design Problems: A certain class of principal-agent problems are called mechanism design problems. In these, a principal would like to condition her own actions on the private information of agents. The principal must offer incentives for the agents to reveal information.

Examples from the theoretical literature are auction design, monopolistic price discrimination, and optimal taxation. In an auction the seller would like to set a price just below the highest valuation of a potential buyer, but does not know that price, and an auction is a mechanism to at least partially reveal it. In a price discrimination, the seller would like to offer the product at different prices to groups with different valuations but may not be able to identify which group an agent is a member of in advance. (Econterms)

Terms related to Mechanism Design Problems:

• Principal-Agent Problem
• Auction
• Price Discrimination