The Optimality of Constant Mark-Up Pricing

Dirk Bergemann, Tibor Heumann and Stephen Morris

No 2353, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We consider a nonlinear pricing environment with private information. We provide profit guarantees (and associated mechanisms) that the seller can achieve across all possible distributions of willingness to pay of the buyers. With a constant elasticity cost function, constant markup pricing provides the optimal revenue guarantee across all possible distributions of willingness to pay and the lower bound is attained under a Pareto distribution. We characterize how profits and consumer surplus vary with the distribution of values and show that Pareto distributions are extremal. We also provide a revenue guarantee for general cost functions. We establish equivalent results for optimal procurement policies that support maximal surplus guarantees for the buyer given all possible cost distributions of the sellers.

Pages: 78 pages
Date: 2023-01
New Economics Papers: this item is included in nep-com, nep-des, nep-ind, nep-mic and nep-reg
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Related works:
Working Paper: The Optimality of Constant Mark-Up Pricing (2023)
Working Paper: The Optimality of Constant Mark-Up Pricing (2023)
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