An Empirical Analysis of Optimal Nonlinear Pricing

An Empirical Analysis of Optimal Nonlinear Pricing
Author: Soheil Ghili
Publisher:
Total Pages: 0
Release: 2023
Genre:
ISBN:

In "continuous choice" settings, consumers decide not only on whether to purchase a product, but also on how much to purchase. As a result, firms should optimize a full price schedule rather than a single price point. This paper provides a methodology to empirically estimate the optimal schedule under multi-dimensional consumer heterogeneity. We apply our method to novel data from an educational-services firm that contains purchase-size information not only for deals that materialized, but also for potential deals that eventually failed. We show that the optimal second-degree price discrimination (i.e., optimal nonlinear tariff) improves the firm's profit upon linear pricing by about 7.9%. That said, this second-degree price discrimination scheme only recovers 7.4% of the gap between the profitability of linear pricing (i.e., no price discrimination) and that of infeasible first degree price discrimination. We also conduct several further counterfactual analyses (i) comparing the role of demand- v.s. cost-side factors in shaping the optimal price schedule, (ii) examining third-degree price discrimination, and (iii) empirically quantifying the magnitude by which incentive-compatibility constraints impact the optimal pricing and profits.

An Empirical Analysis of Competitive Nonlinear Pricing

An Empirical Analysis of Competitive Nonlinear Pricing
Author: Gaurab Aryal
Publisher:
Total Pages: 42
Release: 2019
Genre:
ISBN:

We estimate a model of competitive nonlinear pricing with multidimensional preference heterogeneity using individual level data on advertisements bought by local businesses (e.g., doctors, electricians) from two Yellow Page Directories in one U.S. city-market. Variation in individual choices and payments allow us to identify the joint density of preferences, marginal costs of publishing and common utility parameters. Our estimates suggest substantial welfare loss due to asymmetric information. Comparing duopoly outcomes with (counterfactual) monopoly outcomes, we find that with less competition (i) producer surplus increases substantially; (ii) more “low-type” consumers are excluded; (iii) product variety increases, but benefits accrue only to the “high-type” consumers; (iv) total consumer surplus decreases; (v) but its distribution, across consumers, does not change.

Nonlinear Pricing with Average-price Bias

Nonlinear Pricing with Average-price Bias
Author: David Martimort
Publisher:
Total Pages: 28
Release: 2019
Genre: Consumers
ISBN:

Empirical evidence suggests that consumers facing complex nonlinear pricing often make choices based on average (not marginal) prices. Given such behavior, we characterize a monopolist's optimal nonlinear price schedule. In contrast to the textbook setting, nonlinear prices designed for "average-price bias" distort consumption downward for consumers at the top, may produce efficient consumption for consumers at the bottom, and typically feature quantity premia rather than quantity discounts. These properties arise because the bias replaces consumer information rents with curvature rents. Whether or not a monopolist prefers consumers with average-price bias depends upon underlying preferences and costs.

Optimal Nonlinear Pricing by a Dominant Firm Under Competition

Optimal Nonlinear Pricing by a Dominant Firm Under Competition
Author: Yong Chao
Publisher:
Total Pages: 47
Release: 2019
Genre:
ISBN:

We consider a nonlinear pricing problem faced by a dominant firm which competes with a capacity-constrained minor firm for a downstream buyer who may purchase the product from the firms under complete information. Specifically, we analyze a three-stage game in which the dominant firm offers a general tariff first and then the minor firm responds with a per-unit price, followed by the buyer choosing her purchases. By establishing an equivalence between the subgame perfect equilibrium of our asymmetric competition game and the optimal mechanism in a “virtual” principal-agent model, we characterize the dominant firm's optimal nonlinear tariff, which exhibits convexity and yet can display quantity discounts. Our analysis provides a rationale for nonlinear pricing under competition in the absence of private information: The dominant firm can use unchosen offers to constrain its rival's possible deviations and extract more surplus from the buyer. Antitrust implications are also discussed.

Nonlinear Pricing

Nonlinear Pricing
Author: Robert B. Wilson
Publisher: Oxford University Press, USA
Total Pages: 446
Release: 1993
Genre: Business & Economics
ISBN: 9780195115826

What do phone rates, frequent flyer programs, and railroad tariffs all have in common? They are all examples of nonlinear pricing. Pricing is nonlinear when it is not strictly proportional to the quantity purchased. The Electric Power Research Institute has commissioned Robert Wilson to review the various facets of nonlinear pricing. The work starts with a general non-mathematical discussion, followed by a more technical presentation intended for readers with a fairly advanced background. Thorough and detailed, this study has ample examples of case studies from a variety of industries.

Stress Testing Structural Models of Unobserved Heterogeneity

Stress Testing Structural Models of Unobserved Heterogeneity
Author: Aaron L. Bodoh-Creed
Publisher:
Total Pages: 0
Release: 2023
Genre:
ISBN:

In this paper, we provide a suite of tools for empirical market design, including optimal nonlinear pricing in intensive-margin consumer demand, as well as a broad class of related adverse-selection models. Despite significant data limitations, we are able to derive informative bounds on demand under counterfactual price changes. These bounds arise because empirically plausible DGPs must respect the Law of Demand and the observed shift(s) in aggregate demand resulting from a known exogenous price change(s). These bounds facilitate robust policy prescriptions using rich, internal data sources similar to those available in many real-world applications. Our partial identification approach enables viable nonlinear pricing design while achieving robustness against worst-case deviations from baseline model assumptions. As a side benefit, our identification results also provide useful, novel insights into optimal experimental design for pricing RCTs.