A Transactions Cost Analysis of the Welfare and Output Effects of Rebates and Non-Linear Pricing

47 Pages Posted: 31 May 2023 Last revised: 27 Mar 2024

See all articles by Bruce H. Kobayashi

Bruce H. Kobayashi

George Mason University - Antonin Scalia Law School

Joshua D. Wright

Lodestar Law and Economics

Date Written: May 30, 2023

Abstract

Ronald Coase famously exposed the limitations of economic analyses that rely upon assumptions of frictionless markets. He highlighted the importance of including transaction costs in economic analyses and issued a challenge to economists to think seriously about how transaction costs impact economic systems. Harold Demsetz, extended Coase’s analysis to show how these costs alter the way firms price and market their products. Demsetz’ analysis underscored that the costs of providing a market sometimes exceed the benefits of creating one in the first place and examined conditions where transaction costs imply that zero amounts of explicit market pricing will be efficient.

This article focuses upon extending Demsetz’s insights concerning non-linear pricing contracts that seem not to “price” key side effects of the economic exchange. In particular, we analyze the welfare and output effects of two examples of such contracts commonly used by firms that are frequently subject to antitrust scrutiny: metered pricing and loyalty discounts. The analysis demonstrates how a firm’s choice to set prices for its products are influenced by transaction and information costs and examines whether changes in output caused by the use of these non-linear pricing schemes are positively correlated with changes in total and consumer welfare. The article then discusses conditions under which measuring output effects can reliably differentiate between welfare-increasing and welfare-reducing uses of non-linear pricing.

Keywords: transaction cost, non-linear pricing, Coase, Demsetz, frictionless market, consumer welfare

JEL Classification: K2, K20, K21

Suggested Citation

Kobayashi, Bruce H. and Wright, Joshua D., A Transactions Cost Analysis of the Welfare and Output Effects of Rebates and Non-Linear Pricing (May 30, 2023). George Mason Law & Economics Research Paper No. 23-11, Available at SSRN: https://ssrn.com/abstract=4463974 or http://dx.doi.org/10.2139/ssrn.4463974

Bruce H. Kobayashi

George Mason University - Antonin Scalia Law School ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8034 (Phone)
703-993-8088 (Fax)

HOME PAGE: http://mason.gmu.edu/~bkobayas

Joshua D. Wright (Contact Author)

Lodestar Law and Economics ( email )

P.O. Box 751
Mclean, VA 22101
United States

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