Nonlinear Pricing in Markets with Interdependent Demand

Shmuel S. Oren, Stephen A. Smith and Robert Wilson ()
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Shmuel S. Oren: Department of Engineering-Economic Systems, Stanford University, Stanford, California 94305
Stephen A. Smith: Xerox Research Center, 3333 Coyote Hill Road, Palo Alto, California 94304

Marketing Science, 1982, vol. 1, issue 3, 287-313

Abstract: This paper provides a mathematical framework for modeling demand and determining optimal price schedules in markets which have demand externalities and can sustain nonlinear pricing. These fundamental economic concepts appear in the marketplace in the form of mutual buyers' benefits and quantity discounts. The theory addressing these aspects is relevant to a wide variety of goods and services. Examples include tariffs for electronic communications services, pricing of franchises, and royalty fees for copyrighted material and patents. This paper builds on several previous results from microeconomics and extends nonlinear pricing to markets with demand externalities. The implications of this price structure are compared to results obtained for flat rates and two part tariffs in a similar context. A case study is described in which the results were applied to planning the startup of a new electronic communications service.

Keywords: nonlinear pricing; demand externalities; telecommunication networks (search for similar items in EconPapers)
Date: 1982
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Citations: View citations in EconPapers (17)

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