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Nonlinear Pricing Under Regulation: Comparing Cap Rules and Taxes in the Laboratory

Author

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  • Nuño Ledesma José G.
  • Wu Steven Y.
  • Balagtas Joseph V.

Abstract

We report an experiment contrasting the impacts of a tax and a cap rule in a single-product market with two privately-informed buyers. We discuss the effects on choice set and consumer surplus. The policy environment varies across treatments. With regulations, we aim to halve the size of the unregulated large option. Compared to the regulation-free baseline, sellers facing a cap attempt to serve the buyers separately with similar frequency. With a tax, subjects are less likely to offer menus with two alternatives. We find that consumer surplus remains unaffected under a cap rule, while buyers with high appreciation for the product see their surplus diminished by the tax. These results have implications for policy making in the food retail industry and others where authorities aim to regulate consumption while protecting consumer surplus.

Suggested Citation

  • Nuño Ledesma José G. & Wu Steven Y. & Balagtas Joseph V., 2022. "Nonlinear Pricing Under Regulation: Comparing Cap Rules and Taxes in the Laboratory," Working Papers 2022-10, Banco de México.
    • Handle: RePEc:bdm:wpaper:2022-10
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    References listed on IDEAS

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    More about this item

    Keywords

    Experiment; Non linear pricing; portion cap rule; quantity restriction; tax;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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