The Aggregate Welfare Effects of Nonlinear Prices in Supply Chains

We study how nonlinear pricing in supply chains shapes output, firm entry, and aggregate welfare. We develop a general equilibrium model in which firms both charge and pay nonlinear prices along the supply chain. Relative to linear pricing, nonlinear prices increase firm-level output but reduce firm entry by distorting the distribution of profits, yielding ambiguous welfare effects. Using transaction-level data from Chilean firms, we document robust evidence consistent with widespread nonlinear pricing across buyer groups. Calibrating the model to the data, we find that nonlinear pricing raises production but deters entry. In equilibrium, output gains dominate: aggregate welfare losses from market power are approximately 18% lower under nonlinear prices than under linear pricing, indicating that analyses based on linear pricing overstate the welfare costs of market power.