American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Optimal Nonlinear Pricing by a Dominant Firm under Competition
American Economic Journal: Microeconomics
vol. 14,
no. 2, May 2022
(pp. 240–80)
Abstract
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.Citation
Chao, Yong, Guofu Tan, and Adam Chi Leung Wong. 2022. "Optimal Nonlinear Pricing by a Dominant Firm under Competition." American Economic Journal: Microeconomics 14 (2): 240–80. DOI: 10.1257/mic.20190337Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
- D82 Asymmetric and Private Information; Mechanism Design
- K21 Antitrust Law
- L13 Oligopoly and Other Imperfect Markets
- L42 Vertical Restraints; Resale Price Maintenance; Quantity Discounts