Monopolistic nonlinear pricing with consumer entry

Lixin Ye () and Chenglin Zhang ()
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Lixin Ye: Department of Economics, The Ohio State University
Chenglin Zhang: School of Finance, Southwestern University of Economics and Finance, Chengdu, China.

Theoretical Economics, 2017, vol. 12, issue 1

Abstract: We consider consumer entry in the canonical monopolistic nonlinear pricing model (Mussa and Rosen, 1978) wherein consumers learn their preference "types" after incurring privately known entry costs. We show that by taking into account consumer entry, the nature of optimal nonlinear pricing contracts changes significantly: compared to the benchmark without costly entry, in our model both quality distortion and market exclusion are reduced, sorting is more likely, and whenever bunching occurs, the bunching interval is necessarily smaller. Additionally, under certain conditions the monopoly solution may even achieve the first best (i.e., production efficiency). We also demonstrate that the optimal monopoly solutions can be ranked according to inverse hazard rate functions of the entry cost, which suggests an interesting dynamic for monopolistic nonlinear pricing with consumer entry.

Keywords: Monopoly; nonlinear pricing; information acquisition; consumer entry; quality distortion; market exclusion (search for similar items in EconPapers)
JEL-codes: D23 D82 L12 L15 (search for similar items in EconPapers)
Date: 2017-02-01
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Citations: View citations in EconPapers (3)

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