Ladder Pricing – A New Form of Wholesale Price Discrimination

Abstract

Wholesale ‘ladder pricing’ involves setting the wholesale price a retailer faces as a non-linear (generally increasing) function of the price chosen by that retailer. The special case where the ladder-pricing contract is linear is shown to be equivalent to a form of revenue sharing. Optimal profit maximizing ladder pricing/revenue sharing is examined, given that retailers are privately informed of their demands and costs, and have control over whether they participate, and if so, what retail price they set. The profit performance of the solution is compared with the alternative of wholesale quantity discounting, as the relative level of retailer demand/cost heterogeneity is varied; ladder pricing/revenue sharing tends to outperform quantity discounting by an increasing amount the greater retailer demand heterogeneity is relative to cost heterogeneity. Ladder pricing has recently been implemented for 08 and related calls in UK telecoms and has been subject to extended legal dispute; the case and issues involved are discussed.