Nonlinear Pricing with Average-Price Bias

31 Pages Posted: 30 Jul 2019

See all articles by David Martimort

David Martimort

Paris School of Economics (PSE)

Lars Stole

University of Chicago - Booth School of Business

Date Written: July 2019

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: average-price bias, curvature rents, Nonlinear Pricing, price discrimination

JEL Classification: D82

Suggested Citation

Martimort, David and Stole, Lars A., Nonlinear Pricing with Average-Price Bias (July 2019). CEPR Discussion Paper No. DP13842, Available at SSRN: https://ssrn.com/abstract=3428364

David Martimort (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Lars A. Stole

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7309 (Phone)
773-702-0458 (Fax)

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