Nonlinear Pricing with Average-Price Bias

Empirical evidence suggests that consumers facing complex nonlinear prices often make choices based on average (not marginal) prices. Given such behavior, we characterize a monopolist’s optimal nonlinear price schedule. In contrast to the textbook setting, nonlinear prices designed for “ average-price bias” distort consumption downward for consumers with the highest marginal utility and typically feature quantity premia rather than quantity discounts. These properties arise because the bias replaces consumer information rents with “curvature rents.” Whether or not a monopolist prefers consumers with average-price bias depends upon underlying preferences and costs. (JEL D11, D21, D42, L12)