Working Paper: CEPR ID: DP13842
Authors: David Martimort; Lars Stole
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.
Keywords: nonlinear pricing; average price bias; curvature rents; price discrimination
JEL Codes: D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average-price bias (P22) | downward consumption distortion for high-demand consumers (D11) |
| average-price bias (P22) | monopolist's pricing strategy adaptation (D42) |
| average-price bias (P22) | curvature rents generation (C29) |
| average-price bias (P22) | monopolist's optimal pricing schedule features quantity premia (D42) |
| average-price bias (P22) | expected monopoly profits and consumer surplus equality (D42) |