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Nonlinear pricing under inequity aversion

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  • Destan, Cavit Görkem
  • Yılmaz, Murat

Abstract

We consider a monopoly which practices nonlinear pricing, where buyers may have inequity-averse preferences. Each buyer has a valuation for the good, drawn from a distribution. The monopoly knows the distribution but not the realizations. We introduce the possibility that any buyer can be inequity-averse (fair types) or not (neutral types), in addition to different demand types. Fair types get a disutility from inequity captured through a utility function in the spirit of the one introduced by Fehr and Schmidt (1999). We characterize the optimal nonlinear pricing and show that the degree of suboptimality increases, and the monopoly profit decreases, as the degree of the inequity aversion increases. We also show that some or all of the neutral types with low demand are strictly better off, when there are inequity-averse types in the environment.

Suggested Citation

  • Destan, Cavit Görkem & Yılmaz, Murat, 2020. "Nonlinear pricing under inequity aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 169(C), pages 223-244.
    • Handle: RePEc:eee:jeborg:v:169:y:2020:i:c:p:223-244
    DOI: 10.1016/j.jebo.2019.11.013
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    More about this item

    Keywords

    Price discrimination; Nonlinear pricing; Fairness; Inequity aversion;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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