Nonlinear Pricing by Risk-Averse Principals

33 Pages Posted: 17 Jun 2008

See all articles by Suren Basov

Suren Basov

University of Melbourne - Department of Economics

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Date Written: June 2008


This paper studies the effects of risk aversion on nonlinear pricing. It first develops a model of risk-averse principal, based on Mussa and Rosen (1978), and finds that the equilibrium allocation increases and approaches the efficient level as the principal's risk aversion increases and tends to infinity. The model is then extended to allow for random participation. It is found that the allocation moves towards the efficient level as the monopolistic principal becomes more risk averse. For the case of duopoly, the cost-based two-part tariff is optimal in the full participation equilibrium and the fixed fee component monotonically decreases to zero when the coefficient of absolute risk aversion of the principals tends to infinity.

Keywords: nonlinear pricing, risk aversion, random participation, monopoly, duopoly

JEL Classification: D42, D43, D82

Suggested Citation

Basov, Suren and Yin, Xiangkang, Nonlinear Pricing by Risk-Averse Principals (June 2008). Available at SSRN: or

Suren Basov

University of Melbourne - Department of Economics ( email )


Xiangkang Yin (Contact Author)

Deakin University ( email )

Melbourne, Victoria

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane


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