“Monopolistic Nonlinear Pricing with Costly Information Acquisition” by Lixin Ye
Ohio State University
We consider consumer entry in the canonical monopolistic nonlinear pricing model (Mussa and Rosen, 1978) wherein consumers incur privately known entry costs in order to learn their preference "intensities." We show that by taking into account consumer entry, the nature of optimal nonlinear pricing contracts changes dramatically: both quality distortion and market exclusion are reduced compared to the benchmark without costly information acquisition, and the monopoly solution may even achieve the first best (i.e., production efficiency) under certain conditions. We also show that when the monopolist can charge entry fees, the optimal monopolistic solution is always the first best. Despite the possibility of production efficiency, the monopolist always induces insufficient entry compared to socially efficient entry.