Optimal Nonlinear Pricing by a Dominant Firm under Competition

Yong CHAO, Guofu TAN, Adam Chi Leung WONG

Research output: Journal PublicationsJournal Article (refereed)peer-review

Abstract

We consider a nonlinear pricing problem faced by a dominant firm competing with a minor firm. The dominant firm offers a general tariff first and then the minor firm responds with a per- unit price, followed by a buyer choosing her purchases. By developing a "mechanism design approach" to solve the subgame perfect equilibrium, we characterize the dominant firm's optimal nonlinear tariff, which exhibits convexity and yet can display quantity discounts. In equilibrium the dominant firm uses a continuum of unchosen offers to constrain its rival's potential deviations and extract more surplus from the buyer. Antitrust implications are also discussed.
Original languageEnglish
Pages (from-to)240-280
JournalAmerican Economic Journal: Microeconomics
Volume14
Issue number2
DOIs
Publication statusPublished - May 2022

Bibliographical note

We gratefully acknowledge helpful comments from two anonymous referees, Sandro Brusco, Giacomo Calzolari, Jimmy Chan, Yeon-Koo Che, Jiawei Chen, Ami Glazer, Fei Li, Giuseppe Lopomo, Preston McAfee, Alessandro Pavan, Patrick Rey, Mingjun Xiao, Huseyin Yildirim, Jidong Zhou, and seminar participants at Caltech, SHUFE, UC Davis, UCSB, HKU, USC, ZJU, UBC, University of Washington, UC Irvine, NCKU, CUHK, Nagoya University, UIUC, UNCC, UIBE, CityU, Wuhan U, 2017 Triangle Microeconomics Conference, 2017 Workshop on IOMS, 2018 NSF/NBER/CEME Decentralization Conference, 2018 CRESS-JUFE Conference, IO Workshop at University of St. Gallen, 17th IIOC, 2019 AMES, and Tsinghua BEAT 2019

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