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Optimal Nonlinear Pricing by a Dominant Firm under Competition†

Optimal Nonlinear Pricing by a Dominant Firm under Competition† AbstractWe consider a nonlinear pricing problem faced by a dominant firm competing with a minor firm. The dominant firm offers a general tariff first, and then the minor firm responds with a per-unit price, followed by a buyer choosing her purchases. By developing a mechanism-design approach to solve the subgame perfect equilibrium, we characterize the dominant firm’s optimal nonlinear tariff, which exhibits convexity and yet can display quantity discounts. In equilibrium the dominant firm uses a continuum of unchosen offers to constrain its rival’s potential deviations and extract more surplus from the buyer. Antitrust implications are also discussed. (JEL D21, D43, D82, K21, L13, L42) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Microeconomics American Economic Association

Optimal Nonlinear Pricing by a Dominant Firm under Competition†

Optimal Nonlinear Pricing by a Dominant Firm under Competition†

American Economic Journal: Microeconomics , Volume 14 (2) – May 1, 2022

Abstract

AbstractWe consider a nonlinear pricing problem faced by a dominant firm competing with a minor firm. The dominant firm offers a general tariff first, and then the minor firm responds with a per-unit price, followed by a buyer choosing her purchases. By developing a mechanism-design approach to solve the subgame perfect equilibrium, we characterize the dominant firm’s optimal nonlinear tariff, which exhibits convexity and yet can display quantity discounts. In equilibrium the dominant firm uses a continuum of unchosen offers to constrain its rival’s potential deviations and extract more surplus from the buyer. Antitrust implications are also discussed. (JEL D21, D43, D82, K21, L13, L42)

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Publisher
American Economic Association
Copyright
Copyright © 2022 © American Economic Association
ISSN
1945-7685
DOI
10.1257/mic.20190337
Publisher site
See Article on Publisher Site

Abstract

AbstractWe consider a nonlinear pricing problem faced by a dominant firm competing with a minor firm. The dominant firm offers a general tariff first, and then the minor firm responds with a per-unit price, followed by a buyer choosing her purchases. By developing a mechanism-design approach to solve the subgame perfect equilibrium, we characterize the dominant firm’s optimal nonlinear tariff, which exhibits convexity and yet can display quantity discounts. In equilibrium the dominant firm uses a continuum of unchosen offers to constrain its rival’s potential deviations and extract more surplus from the buyer. Antitrust implications are also discussed. (JEL D21, D43, D82, K21, L13, L42)

Journal

American Economic Journal: MicroeconomicsAmerican Economic Association

Published: May 1, 2022

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