Nonlinear Pricing by a Dominant Firm under Competition

49 Pages Posted: 14 Jan 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: January 6, 2019

Abstract

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

Chao, Yong and Tan, Guofu and Wong, Chi Leung, Nonlinear Pricing by a Dominant Firm under Competition (January 6, 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
50
Abstract Views
347
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information