Optimal Nonlinear Pricing by a Dominant Firm Under Competition

45 Pages Posted: 14 Jan 2019 Last revised: 12 Jul 2019

See all articles by Yong Chao

Yong Chao

University of Louisville - College of Business - Department of Economics

Guofu Tan

University of Southern California - Department of Economics

Adam Chi Leung Wong

Lingnan University - Department of Economics

Date Written: July 10, 2019

Abstract

We consider a nonlinear pricing problem faced by a dominant firm which competes with a capacity-constrained minor firm for a downstream buyer who may purchase the product from the firms under complete information. Specifically, we analyze a three-stage game in which the dominant firm offers a general tariff first and then the minor firm responds with a per-unit price, followed by the buyer choosing her purchases. By establishing an equivalence between the subgame perfect equilibrium of our asymmetric competition game and the optimal mechanism in a “virtual” principal-agent model, we characterize the dominant firm's optimal nonlinear tariff, which exhibits convexity and yet can display quantity discounts. Our analysis provides a rationale for nonlinear pricing under competition in the absence of private information: The dominant firm can use unchosen offers to constrain its rival’s possible deviations and extract more surplus from the buyer. Antitrust implications are also discussed.

Keywords: Optimal Nonlinear Pricing, Complete Information, Capacity Constraint, Partial Foreclosure

JEL Classification: L13, L42, K21

Suggested Citation

Chao, Yong and Tan, Guofu and Wong, Chi Leung, Optimal Nonlinear Pricing by a Dominant Firm Under Competition (July 10, 2019). Available at SSRN: https://ssrn.com/abstract=3314159 or http://dx.doi.org/10.2139/ssrn.3314159

Yong Chao

University of Louisville - College of Business - Department of Economics ( email )

Louisville, KY 40292
United States
(502)852-3573 (Phone)
(502)852-7672 (Fax)

HOME PAGE: http://yongchao.us

Guofu Tan

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
213-740-3520 (Phone)

Chi Leung Wong (Contact Author)

Lingnan University - Department of Economics ( email )

8 Castle Peak Road
Lingnan University
Hong Kong
Hong Kong

Register to save articles to
your library

Register

Paper statistics

Downloads
52
Abstract Views
364
rank
376,614
PlumX Metrics