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- Title
Competitive Non-linear Pricing and Bundling.
- Authors
Armstrong, Mark; Vickers, John
- Abstract
We examine competitive non-linear pricing in a model in which consumers have heterogeneous and elastic demands and can buy from more than one supplier. It is an equilibrium for firms to offer a menu of efficient two-part tariffs, where the discount for one-stop shopping is such that the elasticity of “demand for two-stop shopping” equals two. Compared with linear pricing, non-linear pricing tends to raise profit but harm consumers when: (i) demand is elastic, (ii) there is heterogeneity in consumer demand, (iii) consumers incur shopping costs when buying from more than one firm, and (iv) a consumer's brand preference for one product is correlated with her brand preference for another product. Non-linear pricing is more likely to lead to welfare gains when (iii) and (iv) hold, but (ii) does not.
- Subjects
NONLINEAR pricing; PRODUCT bundling; CONSUMPTION (Economics); ECONOMIC demand; BUSINESS enterprises; TARIFF; HETEROGENEITY; BRAND choice; CONSUMERS
- Publication
Review of Economic Studies, 2010, Vol 77, Issue 1, p30
- ISSN
0034-6527
- Publication type
Article
- DOI
10.1111/j.1467-937X.2009.00562.x