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Optimal Nonlinear Pricing by a Dominant Firm under Competition

Author

Listed:
  • Yong Chao
  • Guofu Tan
  • Adam Chi Leung Wong

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.

Suggested Citation

  • Yong Chao & Guofu Tan & Adam Chi Leung Wong, 2022. "Optimal Nonlinear Pricing by a Dominant Firm under Competition," American Economic Journal: Microeconomics, American Economic Association, vol. 14(2), pages 240-280, May.
    • Handle: RePEc:aea:aejmic:v:14:y:2022:i:2:p:240-80
    DOI: 10.1257/mic.20190337
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    Cited by:

    1. Chen, Claire Y.T. & Sun, Edward W. & Miao, Wanyu & Lin, Yi-Bing, 2024. "Reconciling business analytics with graphically initialized subspace clustering for optimal nonlinear pricing," European Journal of Operational Research, Elsevier, vol. 312(3), pages 1086-1107.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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