Menu Implementability and Practical Pricing Schemes

38 Pages Posted: 24 Aug 2011 Last revised: 20 Feb 2012

See all articles by Adam Chi Leung Wong

Adam Chi Leung Wong

Lingnan University - Department of Economics

Date Written: February 20, 2012

Abstract

In the context of monopolistic nonlinear pricing, we compare the maximum profits of bundling, incremental discounts, and all-units discounts. When the number of pricing blocks is unrestricted, incremental discounts perform weakly the worst. However, if the performance of incremental discounts is not strictly worse when the number of blocks is unrestricted, then it performs the best when the number of blocks is restricted. It is because incremental discounts have the smallest "implementation power" and the largest "approximation power". These results are applications of our general theory of menu implementability, which characterizes the set of outcomes implementable by a menu of tariff options, where the set of admissible tariff options and the number of tariff options in the menu are pre-determined.

Keywords: Nonlinear pricing, Bundling, Incremental discounts, All-units discounts, Incentive-compatible mechanisms

JEL Classification: D42, D82, D86, L12

Suggested Citation

Wong, Chi Leung, Menu Implementability and Practical Pricing Schemes (February 20, 2012). Available at SSRN: https://ssrn.com/abstract=1915752 or http://dx.doi.org/10.2139/ssrn.1915752

Chi Leung Wong (Contact Author)

Lingnan University - Department of Economics ( email )

8 Castle Peak Road
Lingnan University
Hong Kong
Hong Kong

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