Nonlinear Prices, Homogeneous Goods, Search

TL;DR

This paper examines how nonlinear pricing strategies, specifically two-part tariffs, influence competition and consumer welfare in homogeneous goods markets with consumer search, revealing that such pricing can lead to higher profits for firms but worse outcomes for consumers.

Contribution

It demonstrates that equilibrium two-part tariffs are socially efficient and that firms compete mainly through lump-sum fees, a novel insight into nonlinear pricing in search markets.

Findings

Equilibrium two-part tariffs are socially efficient.

Firms earn higher profits with two-part tariffs.

Consumers are worse-off compared to linear pricing.

Abstract

We analyze competition on nonlinear prices in homogeneous goods markets with consumer search. In equilibrium firms offer two-part tariffs consisting of a linear price and lump-sum fee. The equilibrium production is socially efficient as the linear price of equilibrium two-part tariffs equals to the production marginal cost. Firms thus compete in lump-sum fees, which are dispersed in equilibrium. We show that sellers enjoy higher profit, whereas consumers are worse-off with two-part tariffs than with linear prices. The competition softens because with two-part tariffs firms can make effective per-consumer demand less elastic than the actual demand.