Competitive Nonlinear Pricing and Bundling
AbstractWe examine the impact of multiproduct nonlinear pricing on profit, consumer surplus and welfare in a duopoly. When consumers buy all their products from one firm (the one-stop shopping model), nonlinear pricing leads to higher profit and welfare, but often lower consumer surplus, than linear pricing. By contrast, in a unit-demand model where consumers may buy one product from one firm and another product from another firm, bundling generally acts to reduce profit and welfare and to boost consumer surplus. In a more general model where consumers may buy from more than one firm and where consumers have elastic demands for each product, nonlinear pricing has ambiguous effects. Compared with linear pricing, nonlinear pricing tends to raise profit but harm consumer surplus when: (i) demand is elastic, (ii) there is substantial product differentiation, (iii) there is substantial heterogeneity in consumer demand, (iv) consumers face substantial shopping costs when visiting more than one firm, and (v) a consumer`s brand preference for one product is strongly correlated with her brand preference for another product. Nonlinear pricing is more likely to lead to welfare gains when (i), (ii), (iv) and (v) hold, but (iii) does not.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 281.
Date of creation: 01 Sep 2006
Date of revision:
Nonlinear Pricing; Bundling; Discounts;
Other versions of this item:
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-14 (All new papers)
- NEP-COM-2006-10-14 (Industrial Competition)
- NEP-IND-2006-10-14 (Industrial Organization)
- NEP-MIC-2006-10-14 (Microeconomics)
- NEP-MKT-2006-10-14 (Marketing)
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