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Nonlinear pricing under inequity aversion

Cavit Görkem Destan and Murat Yılmaz

Journal of Economic Behavior & Organization, 2020, vol. 169, issue C, 223-244

Abstract: We consider a monopoly which practices nonlinear pricing, where buyers may have inequity-averse preferences. Each buyer has a valuation for the good, drawn from a distribution. The monopoly knows the distribution but not the realizations. We introduce the possibility that any buyer can be inequity-averse (fair types) or not (neutral types), in addition to different demand types. Fair types get a disutility from inequity captured through a utility function in the spirit of the one introduced by Fehr and Schmidt (1999). We characterize the optimal nonlinear pricing and show that the degree of suboptimality increases, and the monopoly profit decreases, as the degree of the inequity aversion increases. We also show that some or all of the neutral types with low demand are strictly better off, when there are inequity-averse types in the environment.

Keywords: Price discrimination; Nonlinear pricing; Fairness; Inequity aversion (search for similar items in EconPapers)
JEL-codes: D03 D42 L11 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jebo.2019.11.013

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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