Abstract
Chapter 12 shows how a price-searching firm maximizes profits if its product faces a well-defined downward-sloping demand curve, given that the firm must sell all units of its product for the same price and that the per-unit price is the only charge that the seller can impose on the product’s buyers. This pricing regime is often called linear pricing. This chapter analyzes deviations from linear pricing, which potentially increase the seller’s profit.
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Notes
- 1.
Similar conditions must hold for other pricing strategies. These strategies include tying or bundling and the use of quality differences to facilitate market segmentation.
- 2.
An exercise: Assume that the good can be sold in arbitrarily small units so that the equations for the demand, marginal revenue, and marginal cost curves can be used to determine all values. Determine the profit-maximizing quantity, the efficient quantity, and the values of the two unexploited surpluses. Why are these values larger than the ones reported in the text? Use a graph to illustrate your answer.
- 3.
Lest one appear cynical and say that this implies that colleges are engaging in profit-maximizing behavior realize that managing a limited budget for granting rebates efficiently requires the same sort of behavior that one would observe if profit maximization were the goal.
- 4.
The analysis changes only slightly if the marginal cost differs across markets.
- 5.
The syntax of subst calls for a single list of substitutions. Because param is such a list, we need a way to add to this list rather than inserting a second list. The cons command accomplishes this task.
References
Wilson RB (1997) Nonlinear pricing. Oxford University Press, New York
Further Readings
The table in the preface lists chapters in microeconomics textbooks that relate to this chapter. The following can also be of value:
Anderson ET, Dana JD (2009) When is price discrimination profitable? Manage Sci 55:980–989. The paper develops a framework for analyzing many important types of price discrimination: intertemporal price discrimination, damaged goods, advance purchase discounts, coupons (rebates), and information goods (list taken from the paper).
McAfee RP (2007) Pricing damaged goods. Economics Discussion Papers, No 2007-2, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2007-2. This paper shows how firms can segment markets by impairing some units its product and selling them at a reduced price. It presents numerous examples. A paper by Deneckere and McAfee (1996), cited in this paper, contains additional examples.
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Hammock, M.R., Mixon, J.W. (2013). Nonlinear Pricing: Capturing Consumer Surplus. In: Microeconomic Theory and Computation. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-9417-1_13
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