American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Nonlinear Pricing and Misallocation
American Economic Review
(pp. 3853–3908)
Abstract
This paper studies the effect of nonlinear pricing on markups and misallocation. In a general equilibrium model in which firms are allowed to set a quantity-dependent pricing schedule, markup heterogeneity is not a sign of misallocation. Instead, we point to a new source of misallocation: high-taste consumers are allocated too much of each good, low-taste consumers too little. Using micro data from the retail sector, we show that nonlinear pricing is prevalent and quantify the model. Welfare losses from misallocation across consumers are substantially larger than those from misallocation across firms under linear pricing.Citation
Bornstein, Gideon, and Alessandra Peter. 2025. "Nonlinear Pricing and Misallocation." American Economic Review 115 (11): 3853–3908. DOI: 10.1257/aer.20230168Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- D24 Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- J22 Time Allocation and Labor Supply
- L13 Oligopoly and Other Imperfect Markets
- L81 Retail and Wholesale Trade; e-Commerce