Evaluating Welfare with Nonlinear Prices

This paper examines how to evaluate consumer welfare when consumers face nonlinear prices. This problem arises in many settings, such as devising optimal pricing strategies for firms, assessing how price discrimination affects consumers, and evaluating the efficiency costs of many transfer programs in the public sector. We extend prior methods to accommodate a broad range of modern pricing practices, including menus of pricing plans. This analysis yields a simpler and more general technique for evaluating exact consumer surplus changes in settings where consumers face nonlinear prices. We illustrate our method using recent changes in mobile phone service plans. †Graduate School of Business, Stanford University, Stanford, CA 94305-5015, and NBER. ‡The Wharton School, University of Pennsylvania, Philadelphia PA 19104-6372, and NBER. Acknowledgments. Many thanks to Katja Seim for the internet access and mobile phone plan data.