Nonconvex Production Technology and Price Discrimination

29 Pages Posted: 9 Oct 2008

See all articles by Bing Jing

Bing Jing

New York University (NYU) - Department of Information, Operations, and Management Sciences

Roy Radner

Leonard N. Stern School of Business - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 2004

Abstract

We revisit the issue of product line design by a monopolist andextend the model of Mussa and Rosen (1978) in two ways. First, weconsider the case in which the unit cost is a nonconvex function ofproduct quality. We show that the firm does not offer those qualitieswhere the unit cost is linear or exceeds its lower convex envelope.Consequently, there are "gaps" in its optimal quality choice. Second,when the firm can offer only a limited number of quality levels(due to possible fixed costs), we characterize the optimal location ofthese finitely many quality levels. This characterization again has theproperty that none of these qualities will lie within an interval wherethe unit cost is linear or exceeds its lower convex envelope. Severalimplications of the above results are discussed.

Keywords: Product Line Design, Price Discrimination, Product

Suggested Citation

Jing, Bing and Radner, Roy, Nonconvex Production Technology and Price Discrimination (December 2004). Information Systems Working Papers Series, Vol. , pp. -, 2004. Available at SSRN: https://ssrn.com/abstract=1281305

Bing Jing

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States
212-998-0822 (Phone)

Roy Radner

Leonard N. Stern School of Business - Department of Economics ( email )

44 West Fourth Street, 7-180
New York, NY 10012
United States

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