Journal of Economic Literature (JEL) Code(s)
D44, D47, D83, D84
We consider a nonlinear pricing environment with private information. We provide profit guarantees (and associated mechanisms) that the seller can achieve across all possible distributions of willingness to pay of the buyers. With a constant elasticity cost function, constant markup pricing provides the optimal revenue guarantee across all possible distributions of willingness to pay and the lower bound is attained under a Pareto distribution. We characterize how profits and consumer surplus vary with the distribution of values and show that Pareto distributions are extremal. We also provide a revenue guarantee for general cost functions.We establish equivalent results for optimal procurement policies that support maximal surplus guarantees for the buyer given all possible cost distributions of the sellers.
Bergemann, Dirk; Heumann, Tibor; and Morris, Stephen, "The Optimality of Constant Mark-Up Pricing" (2023). Cowles Foundation Discussion Papers. 2735.