10.4 Nonlinear Price Discrimination

Many firms are unable to determine which of their customers have the highest reservation prices. However, such firms may know that most customers are willing to pay more for the first unit than for successive units—that is, a typical customer’s demand curve is downward sloping. Such a firm can price discriminate by letting the price each customer pays vary with the number of units the customer buys. That is, the firm uses nonlinear price discrimination (second-degree price discrimination). Here, the price varies with quantity but each customer faces the same nonlinear pricing schedule.14 To use nonlinear pricing, a firm must have market power and be able to prevent customers who buy at a low price from reselling ...

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