Optimal nonlinear pricing by a regret‐averse monopoly

Abstract

This paper examines the optimal nonlinear pricing by a monopolist who sells a good to two types of buyers with high and low valuation. The monopolist's preferences are characterized by a modified utility function that includes disutility from having chosen ex‐post suboptimal alternatives. Regret aversion is shown to affect the rent extraction‐efficiency tradeoff. When buyers are more likely to have high (low) valuation, the regret‐averse monopolist reduces (enlarges) the downward distortion on the second‐best quantity offered to low‐valuation buyers, thereby resulting in lower (higher) unit prices paid by all buyers. The regret‐averse monopolist always earns a lower expected profit.