Optimal nonlinear pricing by a monopoly with smooth ambiguity preferences

Abstract

This paper examines the optimal nonlinear pricing by a monopolist who has smooth ambiguity preferences and sells a single good to two types of buyers with high and low valuation. Ambiguity arises from the monopolist’s uncertainty about which of the subjective beliefs govern the unobserved types of buyers. We show that the prevalence of ambiguity aversion distorts the rent extraction-efficiency tradeoff under asymmetric information in the standard model. Specifically, the ambiguity-averse monopolist acts in a pessimistic manner with the perception that buyers are less likely to have high valuation than the objective beliefs. Compared with the standard model, low valuation buyers consume a less downward distorted quantity and high valuation buyers enjoy a greater information rent. The unit prices paid by all buyers are reduced and the ambiguity-averse monopolist earns a smaller expected profit.