Strategic Nonlinear Pricing

The objective of this paper is to examine the role of nonlinear strategies in a standard oligopoly framework. We demonstrate that nonlinear pricing may indeed emerge as an equilibrium strategy, but only when firms produce differentiated products, when one firm retains market power due to a cost advantage, or as part of an equilibrium in mixed strategies. In addition, we examine the role of nonlinear pricing in a spatialcompetition framework. Our main conclusion is that in highly competitive markets, nonlinear pricing strategies are not likely to emerge as an equilibrium.