Competitive nonlinear pricing with product differentiation

Abstract

Researchers have shown that nonlinear pricing always yields greater profit than uniform pricing. However, most of these studies on nonlinear pricing have been done under monopoly setting. Unlike the previous studies, we examine the effect of nonlinear pricing in a competitive environment. We provide a game-theoretical explanation on the choice of a pricing structure between uniform and two-part pricing for the competing firms. We find that the degree of competition between the two firms (or the degree of differentiation between the two products) plays an important role in deciding the optimal pricing structure due to a strategic interaction of the two firms. Specifically, we find that both firms can choose uniform pricing as an equilibrium in a highly competitive environment. © 2002 Elsevier Science Inc. All rights reserved.