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Competitive Non-linear Pricing and Bundling

  • Mark Armstrong
  • John Vickers

We examine competitive non-linear pricing in a model in which consumers have heterogeneous and elastic demands and can buy from more than one supplier. It is an equilibrium for firms to offer a menu of efficient two-part tariffs, where the discount for one-stop shopping is such that the elasticity of "demand for two-stop shopping" equals two. Compared with linear pricing, non-linear pricing tends to raise profit but harm consumers when: (i) demand is elastic, (ii) there is heterogeneity in consumer demand, (iii) consumers incur shopping costs when buying from more than one firm, and (iv) a consumer's brand preference for one product is correlated with her brand preference for another product. Non-linear pricing is more likely to lead to welfare gains when (iii) and (iv) hold, but (ii) does not. Copyright , Wiley-Blackwell.

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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2009.00562.x
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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 77 (2010)
Issue (Month): 1 ()
Pages: 30-60

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Handle: RePEc:oup:restud:v:77:y:2010:i:1:p:30-60
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