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Competitive Non-linear Pricing and Bundling

Mark Armstrong^1,2; John Vickers^1,2

¹ University of Oxford · ² University College London

We examine competitive nonlinear 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.Compared with linear pricing, nonlinear pricing tends to raise profit but harm consumers when: (i) demand is elastic, (ii) there is substantial heterogeneity in consumer demand, (iii) consumers face substantial 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.Nonlinear pricing is more likely to lead to welfare gains when (iii) and (iv) hold, but (ii) does not.

DOI

10.1111/j.1467-937x.2009.0562.x

Volume

77 (1)

Pages

30-60

Language

en

Export

BibTeX

Sources

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