DP13842 Nonlinear Pricing with Average-Price Bias

Author(s): David Martimort, Lars Stole
Publication Date: July 2019
Keyword(s): average-price bias, curvature rents, Nonlinear Pricing, price discrimination
JEL(s): D82
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13842

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.