Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

6

Price Discrimination and Monopoly: Nonlinear Pricing

If you buy the New Yorker magazine at the newsstand, you will pay $4.99 per issue, or $234.53 if you buy all forty-seven issues. If instead you purchase an annual subscription you will pay $69.99 for forty-seven issues—a savings of approximately 70 percent over the newsstand price. Similarly, if you are a baseball fan you know that the price per ticket on a season pass is much less than the price per ticket on a game-by-game basis. When you go grocery shopping you find that a 24-pack of Coca-Cola costs less on a price-per-can basis than a six-pack or than a single can. These are all examples of price discrimination that reflect quantity discounts—the more you buy the cheaper it is on a per-unit basis.

Quantity discounting is just away of saying that firms are employing nonlinear prices. The price per unit is not constant but rather varies with some feature of the buying arrangement depending, perhaps, on the consumer's income, value of time, the quantity bought or other characteristics. Such a pricing strategy differs from the linear price discrimination methods discussed in Chapter 5. The goal of nonlinear pricing is to allow the seller to convert as much of the individual consumer's willingness to pay into revenues and profits as possible. We shall see that such techniques are generally more profitable than third-degree price discrimination or linear pricing, precisely because they permit the seller to set a price closer ...