Nonconvex Production Technology and Price Discrimination

21 Pages Posted: 13 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: January 2004

Abstract

A modern firm often employs multiple production technologies based on distinct engineering principles, causing non-convexities in the firm s unit cost as a function of product quality. Extending the model of Mussa and Rosen (1978), this paper investigates how a monopolist s productline design may crucially depend on the non-convexities in the unit cost function. We show that the firm does not offer those qualities where the unit cost exceeds its convex envelope. Consequently, there are "gaps" in its optimal quality choice. When the firm is only permitted to offer alimited number of quality levels (due to possible fixed costs associated with offering each quality), the optimal location of quality levels still lies within those regions of the quality domain where the unit cost function coincides with its convex envelope. We further show that the firm s profit is a supermodular function of its quality levels, and characterize a necessarycondition for the optimal quality location.

Suggested Citation

Jing, Bing and Radner, Roy, Nonconvex Production Technology and Price Discrimination (January 2004). NYU Working Paper No. EC-04-04. Available at SSRN: https://ssrn.com/abstract=1282548

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

Register to save articles to
your library

Register

Paper statistics

Downloads
18
Abstract Views
383
PlumX Metrics