We consider a nonlinear pricing problem faced by a dominant firm competing with a minor firm. The dominant firm offers a general tariff first, and then the minor firm responds with a per-unit price, followed by a buyer choosing her purchases. By developing a mechanism-design approach to solve the subgame perfect equilibrium, we characterize the dominant firm's optimal nonlinear tariff, which exhibits convexity and yet can display quantity discounts. In equilibrium the dominant firm uses a continuum of unchosen offers to constrain its rival's potential deviations and extract more surplus from the buyer. Antitrust implications are also discussed.
Chao, Yong, Guofu Tan, and Adam Chi Leung Wong.
"Optimal Nonlinear Pricing by a Dominant Firm under Competition."
American Economic Journal: Microeconomics,
Firm Behavior: Theory
Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
Asymmetric and Private Information; Mechanism Design
Oligopoly and Other Imperfect Markets
Vertical Restraints; Resale Price Maintenance; Quantity Discounts