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Delivered versus Mill Nonlinear Pricing in Free Entry Markets

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Author Info
Jorge, Silvia Ferreira
Pires, Cesaltina Pacheco

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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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Publisher Info
Paper provided by Universidade Nova de Lisboa, Faculdade de Economia in its series FEUNL Working Paper Series with number wp459.

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Length: 37 pages
Date of creation: 2004
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Handle: RePEc:unl:unlfep:wp459

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Web page: http://www.fe.unl.pt

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

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Find related papers by JEL classification:
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
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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  1. 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. [Downloadable!] (restricted)
    Other versions:
  2. 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. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. W. B. MacLeod & G. Norman & J.F. Thisse, 1987. "Price Discrimination and Equilibrium in Monopolistic Competition," Working Papers 701, Queen's University, Department of Economics.
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  6. Norman, George, 1983. "Spatial Pricing with Differentiated Products," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 291-310, May. [Downloadable!] (restricted)
  7. Ginsburgh, Victor & Weber, Shlomo, 2002. "Product Lines and Price Discrimination in the European Car Market," Manchester School, University of Manchester, vol. 70(1), pages 101-14, January. [Downloadable!] (restricted)
  8. Stole, Lars A, 1995. "Nonlinear Pricing and Oligopoly," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 4(4), pages 529-62, Winter.
  9. 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.
  10. Pires, Cesaltina Pacheco & Sarkar, Soumodip, 2000. "Delivered nonlinear pricing by duopolists," Regional Science and Urban Economics, Elsevier, vol. 30(4), pages 429-456, July. [Downloadable!] (restricted)
  11. Hamilton, Jonathan H. & Thisse, Jacques-Francois, 1992. "Duopoly with spatial and quantity- dependent price discrimination," Regional Science and Urban Economics, Elsevier, vol. 22(2), pages 175-185, June. [Downloadable!] (restricted)
  12. Spulber, Daniel F., 1989. "Product variety and competitive discounts," Journal of Economic Theory, Elsevier, vol. 48(2), pages 510-525, August. [Downloadable!] (restricted)
  13. Kats, Amoz, 1995. "More on Hotelling's stability in competition," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 89-93, March. [Downloadable!] (restricted)
  14. Jonathan Hamilton & Jacques-François Thisse, 1996. "Nonlinear pricing in spatial oligopoly," Review of Economic Design, Springer, vol. 2(1), pages 379-397, December. [Downloadable!] (restricted)
  15. Anderson, Simon P & de Palma, Andre, 1988. "Spatial Price Discrimination with Heterogeneous Products," Review of Economic Studies, Blackwell Publishing, vol. 55(4), pages 573-92, October. [Downloadable!] (restricted)
  16. Novshek, William, 1980. "Equilibrium in simple spatial (or differentiated product) models," Journal of Economic Theory, Elsevier, vol. 22(2), pages 313-326, April. [Downloadable!] (restricted)
  17. 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. [Downloadable!] (restricted)
  18. Thisse, Jacques-Francois & Vives, Xavier, 1988. "On the Strategic Choice of Spatial Price Policy," American Economic Review, American Economic Association, vol. 78(1), pages 122-37, March. [Downloadable!] (restricted)
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  19. Rochet, Jean-Charles & Stole, Lars A, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Blackwell Publishing, vol. 69(1), pages 277-311, January.
  20. B. Curtis Eaton & Myrna Holtz Wooders, 1985. "Sophisticated Entry in a Model of Spatial Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 282-297, Summer. [Downloadable!] (restricted)
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