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Nonlinear Pricing with Average-Price Bias

Author

Listed:
  • David Martimort
  • Lars A. Stole

Abstract

Empirical evidence suggests that consumers facing complex nonlinear prices often make choices based on average (not marginal) prices. Given such behavior, we characterize a monopolist's optimal nonlinear price schedule. In contrast to the textbook setting, nonlinear prices designed for "average-price bias" distort consumption downward for consumers with the highest marginal utility and typically feature quantity premia rather than quantity discounts. These properties arise because the bias replaces consumer information rents with "curvature rents." Whether or not a monopolist prefers consumers with average-price bias depends upon underlying preferences and costs.

Suggested Citation

  • David Martimort & Lars A. Stole, 2020. "Nonlinear Pricing with Average-Price Bias," American Economic Review: Insights, American Economic Association, vol. 2(3), pages 375-396, September.
    • Handle: RePEc:aea:aerins:v:2:y:2020:i:3:p:375-96
    DOI: 10.1257/aeri.20190272
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    Cited by:

    1. Vo, Mike, 2025. "When to degrade a product: The utility-to-cost ratio rule," Economics Letters, Elsevier, vol. 255(C).
    2. Joseph,George & Ayling,Sophie Charlotte Emi & Miquel-Florensa,Pepita & Bejarano,Hernán D. & Cardona,Alejandra Quevedo, 2021. "Behavioral Insights in Infrastructure Sectors : A Survey," Policy Research Working Paper Series 9704, The World Bank.
    3. Diego Alejandro Murillo Taborda, 2021. "Nonlinear Pricing with Misspecified and Arbitrary Perception of the Marginal Price," Papers 2104.10281, arXiv.org.
    4. Rosenthal, Maxwell, 0. "Simple incentives and diverse beliefs," Theoretical Economics, Econometric Society.
    5. Fischer-Thöne, Christian & Rasch, Alexander & Wenzel, Tobias, 2025. "Complex pricing and consumer-side attention," International Journal of Industrial Organization, Elsevier, vol. 99(C).
    6. Jérôme Renault & Claude Crampes, 2025. "Assistance to electricity consumers with price misperception," Working Papers hal-05460697, HAL.
    7. Phuong Ho, 2023. "Nonlinear pricing, biased consumers, and regulatory policy," Journal of Economics, Springer, vol. 138(2), pages 149-164, March.
    8. Philippe Choné & Laurent Linnemer, 2022. "A Class of Behavioral Models for the Profit-Maximizing Firm," CESifo Working Paper Series 9718, CESifo.

    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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