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Nonlinear Pricing in Village Economies

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  • Orazio Attanasio
  • Elena Pastorino

Abstract

We propose a model of price discrimination to account for the nonlinearity of unit prices of basic food items in developing countries. We allow consumers to differ in their marginal willingness and absolute ability to pay for a good, incorporate consumers’ subsistence constraints, and model consumers’ outside options from purchasing a good, such as self-production or access to other markets, which depend on consumers’ preferences and income. We obtain a simple characterization of equilibrium non-linear pricing and show that nonlinear pricing leads to higher levels of consumption and lower marginal prices than those implied by the standard nonlinear pricing model. The model is nonparametrically and semiparametrically identified under common assumptions. We derive nonparametric and semiparametric estimators of the model’s primitives, which can easily be implemented using individual-level data commonly available for beneficiaries of conditional cash transfer programs in developing countries. The model well accounts for our data on rural Mexican villages. Importantly, the standard nonlinear pricing model, a special case of our model, is almost always rejected. We find that sellers have large degrees of market power and exert it by price discriminating across consumers through distortionary quantity discounts. Contrary to the prediction of the standard model, consumption distortions are less pronounced for individuals purchasing small quantities, despite the steep decline of observed unit prices with quantity. Overall, most consumers tend to benefit from nonlinear pricing relative to linear pricing. A novel result is that when sellers have market power, policies such as cash transfers that affect households’ ability to pay can effectively strengthen sellers’ incentive to price discriminate and thereby give rise to asymmetric price changes for low and high quantities, which exacerbate the consumption distortions associated with nonlinear pricing. We find evidence of these patterns in response to transfers in our data. These results confirm the importance of our proposed extension of the standard nonlinear pricing model in evaluating the distributional effects of nonlinear pricing.

Suggested Citation

  • Orazio Attanasio & Elena Pastorino, 2015. "Nonlinear Pricing in Village Economies," NBER Working Papers 21718, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21718 Note: DEV IO LS
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    References listed on IDEAS

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    1. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 209-244.
    2. Attanasio, Orazio & Di Maro, Vincenzo & Lechene, Valérie & Phillips, David, 2013. "Welfare consequences of food prices increases: Evidence from rural Mexico," Journal of Development Economics, Elsevier, pages 136-151.
    3. Cunha, Jesse & De Giorgi, Giacomo & Jayachandran, Seema, 2011. "The Price Effects of Cash Versus In-Kind Transfers," CEPR Discussion Papers 8581, C.E.P.R. Discussion Papers.
    4. Che, Yeon-Koo & Gale, Ian, 2000. "The Optimal Mechanism for Selling to a Budget-Constrained Buyer," Journal of Economic Theory, Elsevier, vol. 92(2), pages 198-233, June.
    5. Pannarunothai, Supasit & Mills, Anne, 1997. "The poor pay more: Health-related inequality in Thailand," Social Science & Medicine, Elsevier, pages 1781-1790.
    6. Manuela Angelucci & Giacomo De Giorgi, 2009. "Indirect Effects of an Aid Program: How Do Cash Transfers Affect Ineligibles' Consumption?," American Economic Review, American Economic Association, vol. 99(1), pages 486-508, March.
    7. Crawford, Gregory S & Shum, Matthew, 2007. "Monopoly Quality Degradation and Regulation in Cable Television," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 181-219, February.
    8. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132-132.
    9. C. N. Kuruwita & K. B. Kulasekera & C. M. Gallagher, 2011. "Generalized varying coefficient models with unknown link function," Biometrika, Biometrika Trust, vol. 98(3), pages 701-710.
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    Cited by:

    1. Casaburi, Lorenzo & Reed, Tristan, 2017. "Competition in Agricultural Markets: An Experimental Approach," CEPR Discussion Papers 11985, C.E.P.R. Discussion Papers.
    2. Miguel Ángel Borrella Mas & Mariano Bosch Mossi & Marcello Sartarelli, 2016. "Non-Contributory Pensions Number-Gender Effects on Poverty and Household Decisions," Working Papers. Serie AD 2016-02, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

    More about this item

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O22 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Project Analysis

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