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A Pedagogical Note on Multitier Pricing Scheme

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Listed:
  • Winston W. Chang
  • Tai-Liang Chen

Abstract

This note derives a new formula for determining a monopolist’s optimal multitier pricing scheme for any given number of tiers. It further characterizes Gabor’s ( Review of Economic Studies ) two-tier pari passu marginal revenue function to the n -tier case. By introducing the individual tier’s marginal revenue and the pari passu marginal revenue in a linear demand case, this note provides a perceptive graphical representation of the optimal pricing scheme, revealing that all tiers’ outputs are equal, the last tier’s price is always higher than the marginal cost, and an increase in the number of tiers increases social welfare. In a class of nonlinear demand functions, it shows that starting from the first tier, the tiers’ outputs are monotonically increasing (decreasing) if the demand function is strictly convex (concave). It also shows that the equal-tier-output property preserves in the linear demand case with the total output fixed as a constraint. JEL Classification : D01, D21, D42, L12, L21

Suggested Citation

  • Winston W. Chang & Tai-Liang Chen, 2018. "A Pedagogical Note on Multitier Pricing Scheme," The American Economist, Sage Publications, vol. 63(2), pages 228-244, October.
    • Handle: RePEc:sae:amerec:v:63:y:2018:i:2:p:228-244
    DOI: 10.1177/0569434517745311
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    References listed on IDEAS

    as
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    5. Winston W. Chang & Tai-Liang Chen, 2017. "The theory of quantity discounts and optimal pricing," International Journal of Economic Theory, The International Society for Economic Theory, vol. 13(2), pages 185-195, June.
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    More about this item

    Keywords

    monopoly; second-degree price discrimination; multitier pricing; public utility pricing; social welfare;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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