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Delivered versus Mill Nonlinear Pricing in Free Entry Markets

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Author Info

  • Sílvia Jorge

    (Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro)

  • Cesaltina Pires

    (Departamento de Gestão de Empresas, Universidade de Évora)

Abstract

This paper discusses a model where consumers simultaneously differ according to one unobservable (preference for quality) and one observable characteristic (location). In these circumstances nonlinear prices arise in equilibrium. The main question addressed in this work is whether firms should be allowed to practise different nonlinear prices at each location (delivered nonlinear pricing) or should be forced to set an unique nonlinear contract (mill nonlinear pricing). Assuming that firms can costless relocate, we show that the free entry long-run number of firms may be either smaller, equal, or higher under delivered nonlinear pricing. In addition, we show that delivered nonlinear pricing yields in the long-run higher welfare and, consequently, our results support the view that discriminatory nonlinear pricing should not be prohibited.

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Bibliographic Info

Paper provided by Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro in its series Working Papers de Economia (Economics Working Papers) with number 22.

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Length: 38 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:ave:wpaper:222004

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Keywords: Delivered nonlinear pricing; Mill nonlinear pricing; Asymmetric information; Pricing regulation;

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References

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  1. Victor Ginsburgh & Shlomo Weber, 2002. "Product lines and price discrimination in the European car market," ULB Institutional Repository 2013/1689, ULB -- Universite Libre de Bruxelles.
  2. HAMILTON , Jonathan & THISSE , Jacques-François, 1996. "Nonlinear pricing in spatial oligopoly," CORE Discussion Papers 1996066, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Davidson, Russell & Dewatripont, Mathias & Ginsburgh, Victor & Labbe, Martine, 1989. "On the welfare effects of anti-discrimination regulations in the EC car market," International Journal of Industrial Organization, Elsevier, vol. 7(2), pages 205-230, June.
  4. Norman, George, 1983. "Spatial Pricing with Differentiated Products," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 291-310, May.
  5. Norman, George & Thisse, Jacques-Francois, 1996. "Product Variety and Welfare under Tough and Soft Pricing Regimes," Economic Journal, Royal Economic Society, vol. 106(434), pages 76-91, January.
  6. Stole, Lars A, 1995. "Nonlinear Pricing and Oligopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 529-62, Winter.
  7. Thisse, J.-F. & Vives, X., 1987. "On the strategic choice of spatial price policy," CORE Discussion Papers 1987008, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Spulber, Daniel F, 1984. "Competition and Multiplant Monopoly with Spatial Nonlinear Pricing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(2), pages 425-39, June.
  9. Rochet, Jean-Charles & Stole, Lars A, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 277-311, January.
  10. HAMILTON, Jonathan & THISSE, Jacques-François, . "Duopoly with spatial and quantity-dependent price discrimination," CORE Discussion Papers RP -998, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Valletti, Tommaso M., 2002. "Location choice and price discrimination in a duopoly," Regional Science and Urban Economics, Elsevier, vol. 32(3), pages 339-358, May.
  12. J. Miguel Villas-Boas & Udo Schmidt-Mohr, 1999. "Oligopoly with Asymmetric Information: Differentiation in Credit Markets," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 375-396, Autumn.
  13. MacLeod, W.B. & Norman, G. & Thisse, J.-F., 1988. "Price discrimination and equilibrium in monopolistic competition," International Journal of Industrial Organization, Elsevier, vol. 6(4), pages 429-446.
  14. Weber Sylvain & Pasche Cyril, 2008. "Price Discrimination," Journal of Industrial Organization Education, De Gruyter, vol. 2(1), pages 1-15, January.
  15. Anderson, Simon P & de Palma, Andre, 1988. "Spatial Price Discrimination with Heterogeneous Products," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 573-92, October.
  16. Kats, Amoz, 1995. "More on Hotelling's stability in competition," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 89-93, March.
  17. Spulber, Daniel F., 1989. "Product variety and competitive discounts," Journal of Economic Theory, Elsevier, vol. 48(2), pages 510-525, August.
  18. Novshek, William, 1980. "Equilibrium in simple spatial (or differentiated product) models," Journal of Economic Theory, Elsevier, vol. 22(2), pages 313-326, April.
  19. Pires, Cesaltina Pacheco & Sarkar, Soumodip, 2000. "Delivered nonlinear pricing by duopolists," Regional Science and Urban Economics, Elsevier, vol. 30(4), pages 429-456, July.
  20. Cesaltina Pires, 2009. "Location choice under delivered pricing: a reinterpretation," The Annals of Regional Science, Springer, vol. 43(1), pages 199-213, March.
  21. Lederer, Phillip J & Hurter, Arthur P, Jr, 1986. "Competition of Firms: Discriminatory Pricing and Location," Econometrica, Econometric Society, vol. 54(3), pages 623-40, May.
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Cited by:
  1. Jorge, Sí­lvia Ferreira & Pires, Cesaltina Pacheco, 2008. "Delivered versus mill nonlinear pricing with endogenous market structure," International Journal of Industrial Organization, Elsevier, vol. 26(3), pages 829-845, May.

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