Cost Based Nonlinear Pricing

Abstract

The arrival of digital commerce has lead to an increasing use of personalization and differentiation strategies. With differentiated products along the quality dimension and/or the quantity dimension comes the need for nonlinear pricing policies or second degree price discrimination. The optimal pricing strategies for quality and quantity differentiated products were first investigated by Mussa and Rosen (1978) and Maskin and Riley (1984), respectively. The optimal pricing strategies were shown to depend heavily on the prior distribution of the private information regarding the types, and ultimately the willingness-to-pay of the buyers. Yet, frequently the sellers possess only weak and incomplete information about the distribution of demand. This paper aims to develop robust pricing policies that are independent of specific demand distributions and provide revenue guarantees across all possible distributions.