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Mixed Linear-Nonlinear Pricing with Bundling

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  • Srinagesh, Padmanabhan

Abstract

The practice of setting marginal prices below marginal costs is so common in telecommunications offerings that it can justifiably be labeled a stylized fact. In this paper, we present a stylized model that establishes conditions under which this practice is economically efficient and profit-maximizing. A mulitproduct monopolist who sells some of his goods according to a nonlinear price schedule, while selling the remaining goods at linear prices, is said to use a mixed price structure. We develop a simple model to characterize welfare- and profit-maximizing mixed prices. It is shown that standard results obtained separately for linear and nonlinear prices do not hold when mixed prices are used. In particular, the marginal price facing the largest buyer can be above or below marginal cost. The result is shown to depend on whether the goods are substitutes or complements. Implications of these results for telecommunications prices are derived, and the intuition underlying our stylized fact is developed. Copyright 1991 by Kluwer Academic Publishers

Suggested Citation

  • Srinagesh, Padmanabhan, 1991. "Mixed Linear-Nonlinear Pricing with Bundling," Journal of Regulatory Economics, Springer, vol. 3(3), pages 251-263, September.
  • Handle: RePEc:kap:regeco:v:3:y:1991:i:3:p:251-63
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    Cited by:

    1. Martin Besfamille & Nicolás Figueroa & León Guzmán, 2023. "Ramsey pricing revisited: Natural monopoly regulation with evaders," Documentos de Trabajo 576, Instituto de Economia. Pontificia Universidad Católica de Chile..

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