Discussion Paper Details

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Title: Nonlinear Pricing with Average-Price Bias

Author(s): David Martimort and Lars Stole

Publication Date: July 2019

Keyword(s): average-price bias, curvature rents, Nonlinear Pricing and price discrimination

Programme Area(s): Industrial Organization

Abstract: Empirical evidence suggests that consumers facing complex nonlinear pricing often make choices based on average (not marginal) prices. Given such behavior, we characterize a monopolist's optimal nonlinear price schedule. In contrast to the textbook setting, nonlinear prices designed for ``average-price bias'' distort consumption downward for consumers at the top, may produce efficient consumption for consumers at the bottom, and typically feature quantity premia rather than quantity discounts. These properties arise because the bias replaces consumer information rents with curvature rents. Whether or not a monopolist prefers consumers with average-price bias depends upon underlying preferences and costs.

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Bibliographic Reference

Martimort, D and Stole, L. 2019. 'Nonlinear Pricing with Average-Price Bias'. London, Centre for Economic Policy Research.