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Delivered versus Mill Nonlinear Pricing in Free Entry Markets

  • Sílvia Jorge

    (Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro)

  • Cesaltina Pires

    (Departamento de Gestão de Empresas, Universidade de Évora)

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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Paper provided by Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro in its series Working Papers de Economia (Economics Working Papers) with number 22.

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Length: 38 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:ave:wpaper:222004
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  1. DAVIDSON, Russell & DEWATRIPONT, Mathias & GINSBURGH, Victor & LABBE, Martine, . "On the welfare effects of anti-discrimination regulations in the EC car market," CORE Discussion Papers RP 848, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  3. Victor Ginsburgh & Shlomo Weber, 2002. "Product lines and price discrimination in the European car market," ULB Institutional Repository 2013/1689, ULB -- Universite Libre de Bruxelles.
  4. 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.
  5. Kats, Amoz, 1995. "More on Hotelling's stability in competition," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 89-93, March.
  6. Thisse, J.-F. & Vives, X., 1987. "On the strategic choice of spatial price policy," CORE Discussion Papers 1987008, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Novshek, William, 1980. "Equilibrium in simple spatial (or differentiated product) models," Journal of Economic Theory, Elsevier, vol. 22(2), pages 313-326, April.
  8. Pires, Cesaltina Pacheco & Sarkar, Soumodip, 2000. "Delivered nonlinear pricing by duopolists," Regional Science and Urban Economics, Elsevier, vol. 30(4), pages 429-456, July.
  9. Jonathan Hamilton & Jacques-François Thisse, 1996. "Nonlinear pricing in spatial oligopoly," Review of Economic Design, Springer, vol. 2(1), pages 379-397, December.
  10. 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.
  11. Cesaltina Pires, 2009. "Location choice under delivered pricing: a reinterpretation," The Annals of Regional Science, Springer, vol. 43(1), pages 199-213, March.
  12. 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.
  13. Stole, Lars A, 1995. "Nonlinear Pricing and Oligopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 529-62, Winter.
  14. 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.
  15. Weber Sylvain & Pasche Cyril, 2008. "Price Discrimination," Journal of Industrial Organization Education, De Gruyter, vol. 2(1), pages 1-15, January.
  16. 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.
  17. Anderson, Simon P & de Palma, Andre, 1988. "Spatial Price Discrimination with Heterogeneous Products," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 573-92, October.
  18. Jean-Charles Rochet & Lars A. Stole, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 277-311.
  19. Norman, George, 1983. "Spatial Pricing with Differentiated Products," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 291-310, May.
  20. 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.
  21. Spulber, Daniel F., 1989. "Product variety and competitive discounts," Journal of Economic Theory, Elsevier, vol. 48(2), pages 510-525, August.
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