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Monopolistic nonlinear pricing with consumer entry

Author

Listed:
  • Ye, Lixin

    (Department of Economics, The Ohio State University)

  • Zhang, Chenglin

    (School of Finance, Southwestern University of Economics and Finance, Chengdu, China.)

Abstract

We consider consumer entry in the canonical monopolistic nonlinear pricing model (Mussa and Rosen, 1978) wherein consumers learn their preference "types" after incurring privately known entry costs. We show that by taking into account consumer entry, the nature of optimal nonlinear pricing contracts changes significantly: compared to the benchmark without costly entry, in our model both quality distortion and market exclusion are reduced, sorting is more likely, and whenever bunching occurs, the bunching interval is necessarily smaller. Additionally, under certain conditions the monopoly solution may even achieve the first best (i.e., production efficiency). We also demonstrate that the optimal monopoly solutions can be ranked according to inverse hazard rate functions of the entry cost, which suggests an interesting dynamic for monopolistic nonlinear pricing with consumer entry.

Suggested Citation

  • Ye, Lixin & Zhang, Chenglin, 2017. "Monopolistic nonlinear pricing with consumer entry," Theoretical Economics, Econometric Society, vol. 12(1), January.
    • Handle: RePEc:the:publsh:1944
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    References listed on IDEAS

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    3. Edward Osei, 2024. "Discrete pricing and consumer utility," Economics Bulletin, AccessEcon, vol. 44(3), pages 1123-1131.

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    More about this item

    Keywords

    Monopoly; nonlinear pricing; information acquisition; consumer entry; quality distortion; market exclusion;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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