Optimal Nonlinear Pricing by a Monopolist with Information Ambiguity

Abstract

We consider optimal nonlinear pricing when there is information ambiguity in a monopolist’s prior belief about the distribution of the buyers. The monopolist’s prior information cannot be described by a probabilistic distribution; rather, it is described by an ϵ-contaminated capacity. We find that information ambiguity leads to bunching at the bottom: in an optimal contract, the monopolist offers a fixed quantity to the buyers with low valuation. Other high valuation buyers are offered the same quantity as in the case with no information ambiguity; however, they get a greater discount. When information ambiguity increases, more buyers at the bottom are offered a fixed quantity, and the quantity they are offered increases; thus, the monopolist has to concede more information rent to the buyers, and all buyers pay a lower unit price.