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The Optimality of Constant Mark-Up Pricing

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Abstract

We consider a nonlinear pricing environment with private information. We provide profit guarantees (and associated mechanisms) that the seller can achieve across all possible distributions of willingness to pay of the buyers. With a constant elasticity cost function, constant markup pricing provides the optimal revenue guarantee across all possible distributions of willingness to pay and the lower bound is attained under a Pareto distribution. We characterize how profits and consumer surplus vary with the distribution of values and show that Pareto distributions are extremal. We also provide a revenue guarantee for general cost functions. We establish equivalent results for optimal procurement policies that support maximal surplus guarantees for the buyer given all possible cost distributions of the sellers.

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  • Dirk Bergemann & Tibor Heumann & Stephen Morris, 2023. "The Optimality of Constant Mark-Up Pricing," Cowles Foundation Discussion Papers 2353, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:2353
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    References listed on IDEAS

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    1. Anne-Katrin Roesler & Balázs Szentes, 2017. "Buyer-Optimal Learning and Monopoly Pricing," American Economic Review, American Economic Association, vol. 107(7), pages 2072-2080, July.
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    3. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
    4. Andreas Kleiner & Benny Moldovanu & Philipp Strack, 2021. "Extreme Points and Majorization: Economic Applications," Econometrica, Econometric Society, vol. 89(4), pages 1557-1593, July.
    5. Gabriel Carroll, 2017. "Robustness and Separation in Multidimensional Screening," Econometrica, Econometric Society, vol. 85, pages 453-488, March.
    6. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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