Armstrong, M.; Vickers, J.; (2008) Competitive nonlinear pricing and bundling. (ELSE Working Papers 220). ESRC Centre for Economic Learning and Social Evolution: London, UK.

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Abstract

We examine competitive nonlinear pricing in a model in which consumers have heterogeneous and elastic demands and can buy from more than one supplier. It is an equilibrium for firms to offer a menu of efficient two-part tariffs. Compared with linear pricing, nonlinear pricing tends to raise profit but harm consumers when: (i) demand is elastic, (ii) there is substantial heterogeneity in consumer demand, (iii) consumers face substantial shopping costs when buying from more than one firm, and (iv) a consumer’s brand preference for one product is correlated with her brand preference for another product. Nonlinear pricing is more likely to lead to welfare gains when (iii) and (iv) hold, but (ii) does not.

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