Three Principles of Competitive Nonlinear Pricing

Abstract:     
We make three contributions to the theory of contracting under asymmetric information. First, we establish a competitive analog to the revelation principle which we call the implementation principle. This principle provides a complete characterization of all incentive compatible, indirect contracting mechanisms in terms of contract catalogs (or menus), and allows us to conclude that in competitive contracting situations, firms in choosing their contracting strategies can restrict attention, without loss of generality, to contract catalogs. Second, we establish a competitive taxation principle. This principle, a refinement of the implementation principle, provides a complete characterization of all implementable nonlinear pricing schedules in terms of product-price catalogs and allows us to reduce any game played over nonlinear pricing schedules to a strategically equivalent game played over product-price catalogs. Third, using the competitive taxation principle and a recent result due to Reny (1999) on the existence of Nash equilibria in discontinuous games, we demonstrate the existence of a Nash equilibrium for the mixed extension of the nonlinear pricing game.

Keywords: competitive nonlinear pricing, delegation principle, implementation principle, competitive taxation principle, revelation principle, Nash equilibria for discontinuous games

JEL Classification: D82, L51

Accepted Paper Series