Intrapersonal price discrimination and welfare in a dominant firm model

In a homogeneous good industry composed of a dominant firm and a fringe of followers that can choose non-linear pricing contracts to sell the good, we demonstrate that only the dominant firm uses them. Compared with the standard dominant firm model in which only linear pricing contracts are feasible, the dominant firm supplies an inefficiently low number of customers as a way to extract more surplus, since the alternative for customers is a fringe cluttered by excess demand. Thus, allowing market-power firms to deploy non-linear pricing contracts leads to market segmentation, and customers end up worse off than under linear pricing contracts. Fringe firms, in contrast, are better off since they end up charging a higher price for the good. Finally, aggregate welfare under non-linear pricing increases (decreases) as compared to linear pricing if the dominant firm’s share of production capacity is (is not) large enough.