A Pedagogical Note on Multitier Pricing Scheme. (October 2018)

• Record Type: Journal Article
• Authors: Chang, Winston W.; Chen, Tai-Liang
• Is Part Of: American economist. Volume 63:Number 2(2018)
• Page Start: 228
• Page End: 244
• Publication Date: 2018-10
• Subjects: monopoly -- second-degree price discrimination -- multitier pricing -- public utility pricing -- social welfare; Economics -- Periodicals; Économie politique -- Périodiques; Economics; Electronic journals; Periodicals; 330.05
• DOI: 10.1177/0569434517745311
• Languages: English
• ISSNs: 0569-4345

Abstract

This note derives a new formula for determining a monopolist's optimal multitier pricing scheme for any given number of tiers. It further characterizes Gabor's ( Review of Economic Studies ) two-tier pari passu marginal revenue function to then -tier case. By introducing the individual tier's marginal revenue and the pari passu marginal revenue in a linear demand case, this note provides a perceptive graphical representation of the optimal pricing scheme, revealing that all tiers' outputs are equal, the last tier's price is always higher than the marginal cost, and an increase in the number of tiers increases social welfare. In a class of nonlinear demand functions, it shows that starting from the first tier, the tiers' outputs are monotonically increasing (decreasing) if the demand function is strictly convex (concave). It also shows that the equal-tier-output property preserves in the linear demand case with the total output fixed as a constraint. JEL Classification : D01, D21, D42, L12, L21