American Economic Review: Insights
ISSN 2640-205X (Print) | ISSN 2640-2068 (Online)
Nonlinear Pricing with Average-Price Bias
American Economic Review: Insights
vol. 2,
no. 3, September 2020
(pp. 375–96)
Abstract
Empirical evidence suggests that consumers facing complex nonlinear prices 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 with the highest marginal utility 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.Citation
Martimort, David, and Lars A. Stole. 2020. "Nonlinear Pricing with Average-Price Bias." American Economic Review: Insights, 2 (3): 375–96. DOI: 10.1257/aeri.20190272Additional Materials
JEL Classification
- D11 Consumer Economics: Theory
- D21 Firm Behavior: Theory
- D42 Market Structure, Pricing, and Design: Monopoly
- L12 Monopoly; Monopolization Strategies