Menu Implementability and Practical Pricing Schemes
38 Pages Posted: 24 Aug 2011 Last revised: 20 Feb 2012
Date Written: February 20, 2012
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: Suggested Citation