An Empirical Analysis of Competitive Nonlinear Pricing

Abstract We estimate a model of competitive nonlinear pricing, when there is asymmetric information between buyers and sellers about former’s multidimen- sional preferences. We use a novel dataset on advertisements bought by all local businesses from two (duopoly) Yellow Pages directories in Central Pennsylvania. First, we study the identification of the joint distribution of preferences, (constant) marginal costs of publishing and utility parameters. Second, we find a significant welfare loss due to asymmetric information. Third using a merger simulation we estimate efficiency and distributional effects of (a lack of) competition. In particular, when we move from duopoly to a monopoly, we find that: (i) the producer sur- plus increases substantially; (ii) many lower type consumers are excluded; (iii) the product space under monopoly increases; and as a result (iv) consumer surplus for higher types increases. The total consumer surplus, however, decreases but it does not affect the inequality in the distribution of consumer surplus.