Nonlinear Pricing with Asymmetric Competition and Complete Information

Yong CHAO, Guofu TAN, Adam Chi Leung WONG

Research output: Other Conference ContributionsPresentationPresentation

Abstract

Our model is a three-stage game with complete information in which a dominant firm offers a general tariff first and then a rival firm responds with a per-unit price, followed by a buyer making her decision to purchase from one or both firms. We characterize SPE of the game and study the implications of the equilibrium outcome. Our paper makes three main contributions. First, it provides a novel explanation for the prevalence of nonlinear pricing under duopoly in the absence of private information: The dominant firm can use a menu of offers to constrain its rival's choices and extract surplus from the buyer. Second, it shows that when the capacity of the rival firm is constrained, as compared to linear pricing schemes, the nonlinear pricing tariff adopted by the dominant firm reduces the price, sales, and profits of the rival firm as well as the buyer's surplus. Third, we establish an equivalence between a subgame perfect equilibrium of the game and an optimal mechanism in a “virtual” principal-agent model with hidden action and hidden information. As a result of such an equivalence, we can apply mechanism design techniques to solve for SPE of the game.
Original languageEnglish
Publication statusPublished - 2016
EventThe 9th Biennial Conference of Hong Kong Economic Association - The University of Hong Kong, Pokfulam, Hong Kong
Duration: 12 Dec 201613 Dec 2016
http://www.hkea.org.hk/index.php/9th-conference

Conference

ConferenceThe 9th Biennial Conference of Hong Kong Economic Association
CountryHong Kong
CityPokfulam
Period12/12/1613/12/16
OtherHong Kong Economic Association
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CHAO, Y., TAN, G., & WONG, A. C. L. (2016). Nonlinear Pricing with Asymmetric Competition and Complete Information. The 9th Biennial Conference of Hong Kong Economic Association, Pokfulam, Hong Kong.