Posted Prices vs . Haggling : The Economics of Isoperfect Price Discrimination 6 April 2009

Standard discussions of perfect price discrimination rest on a hidden assumption: that the monopolist can make take-it-or-leave-it offers. If a monopoly charges different prices to each of a large number of buyers, the correct paradigm is not the ultimatum game, but bilateral monopoly. The monopolist’s profit will not be the entire surplus, but something less. Under “balanced isoperfect price discrimination”– a constant split λ = .5 of the bargaining surplus with each buyer— and constant marginal cost, the monopolist has the same profit as monopoly pricing if the demand curve is linear, less if demand is concave, and more if demand is convex. Increasing marginal cost tends to make the monopolist prefer price discrimination. Isoperfect price discrimination is complemented by an idiosyncratic product design and informative advertising, whereas simple monopoly pricing is facilitated by plain-vanilla designs promoted via pure hype. Competition pushes suppliers away from isoperfect price discrimination and towards simple posted pricing. REPLACE WITh daviDS VERION OF ABSTRct Myatt: Nuffield College, Room L. University of Oxford, New Road, Oxford, England, OX1 1NF. 011-44-1865 278-578 or (01865) 278-578. [email protected]. Rasmusen: Rasmusen: Dan R. and Catherine M. Dalton Professor, Department of Business Economics and Public Policy, Kelley School of Business, Indiana University. BU 438, 1309 E. 10th Street, Bloomington, Indiana, 47405-1701. (812) 855-9219. Fax: 812-855-3354. [email protected], http: //www.rasmusen.org. This paper: http://www.rasmusen.org/papers/pdisc-myatt-rasmusen.pdf.