Nonlinear Pricing by a Dominant Firm under Competition
49 Pages Posted: 14 Jan 2019
Date Written: January 6, 2019
We provide 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. When the capacity of the rival firm is constrained, as compared to linear pricing, the dominant firm can use the nonlinear pricing to partially foreclose the rival and harm the buyer. By establishing an equivalence between the subgame perfect equilibrium of our asymmetric competition game and an optimal mechanism in a “virtual” principal-agent model, we characterize the optimal nonlinear pricing.
Keywords: Nonlinear Pricing, Capacity Constraint, Partial Foreclosure
JEL Classification: L13, L42, K21
Suggested Citation: Suggested Citation