Delivered versus mill nonlinear pricing with endogenous market structure

Abstract

This paper discusses a model where consumers differ according to one unobservable (preference for quality) and one observable characteristic (location), with nonlinear prices arising in equilibrium. The main question addressed is whether firms should be allowed to practice different nonlinear prices at each location (delivered nonlinear pricing) or should be forced to set a unique nonlinear contract (mill nonlinear pricing). Assuming that firms can costless relocate, we show that the free entry long-run number of firms may be smaller, equal, or higher under delivered nonlinear pricing. Moreover, delivered nonlinear pricing yields higher long-run welfare when (i) fixed costs are low and when (ii) fixed costs are intermediate and consumer types are not very similar.