Nonlinear Pricing by Risk-Averse Principals
33 Pages Posted: 17 Jun 2008
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: Suggested Citation