A Theory of Partitioned Pricing

Zhiqi Chen

No 22-02, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: Partitioned pricing is a common pricing practice that divides the price of a product into a base price and one or more mandatory surcharges. From the perspective of standard economic theory, this practice is puzzling because rational buyers care about the full price they pay for a product rather than whether and how the price is partitioned into various components. This paper develops a theory of partitioned pricing using a duopoly model where the owner of each firm determines the level of surcharge but delegates the setting of base price to a manager. It shows that in equilibrium both firms choose partitioned pricing over conventional all-inclusive pricing. Moreover, partitioned pricing leads to higher full prices and larger profits than all-inclusive pricing. Most surprisingly, collusion on surcharge without any coordination on base price is as profitable as collusion on all-inclusive price.

Keywords: partitioned pricing; surcharges; duopoly; strategic delegation; collusion (search for similar items in EconPapers)
JEL-codes: L11 L22 L41 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2022-02-03
New Economics Papers: this item is included in nep-com, nep-gth and nep-reg
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Published: Carleton Economics Working Papers

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