THE ECONOMICS OF NONLINEAR PRICING: EVIDENCE FROM AIRFARES AND GROCERY PRICES

Allan Poon
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Allan Poon: UWA Business School, The University of Western Australia

No 10-23, Economics Discussion / Working Papers from The University of Western Australia, Department of Economics

Abstract: Quantity discounts, characterised by unit prices falling as the quantity purchased rises, are a proliferate phenomenon that finds root in the economics of packaging. This paper reviews the key economic foundations of nonlinear pricing, introduces new pricing data and conducts an empirical investigation into airfares and grocery prices, which are shown to exhibit quantity discounts of an identical order of magnitude. The constancy of the quantity discount across distinct markets hints at the existence of a common force underlying the determination of prices.

Pages: 26 pages
Date: 2010
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