Competitive nonlinear pricing with product differentiation : an application to internet pricing

Abstract

Most of the previous theoretical studies on nonlinear pricing tend to assume monopoly situations. Given that the nonlinear pricing practices are frequently observed in non-monopoly situations in the real world, it is worthwhile to study nonlinear pricing practices in the competitive markets, where the firms`` demands are interrelated. In this thesis, we analyze nonlinear pricing in a non-monopolistic situation, i.e. in a differentiated duopoly market setting. However, we focus only on two types of nonlinear price schedule, i.e. flat rate and two-part price schedule, due to the mathematical complexity. In Chapter 2 and 3, we analyze the competition between the two firms that have two alternative pricing structures of two-part and uniform pricing. In particular, we compare the effects of two pricing structures (i.e., uniform and two-part pricing policy) on the firm``s profit and derive the Nash equilibrium pricing structure for the firms with respect to the various levels of product differentiation. Our findings from Chapter 2 and 3 are as follows: First, we show that although two-part pricing is always the better pricing strategy than uniform pricing under monopoly market, two-part pricing is not the unique equilibrium if the competition between the two firms becomes intense in the market. There are two Nash equilibria in this highly competitive situation, i.e. UU (both firms adopt uniform pricing) and TT (both firms adopt two-part pricing). Second, TT is the better Nash equilibrium with respect to profit between the two Nash equilibria of UU and TT when the competition is intense. Third, when the two products are highly substitutable, lock-in phenomenon arise under TT pricing structure. Thus, unit price and profit increases whereas fixed charge decreases. In Chapter 4, we analyze the competition between the two firms that have two alternative pricing structures of flat rate and usage-based uniform pricing. Since the widely used pricing schemes by ISPs today are...