Chapter 2 Examining the Effect of Low-Cost Carriers on Nonlinear Pricing Strategies of Legacy Airlines

Firms with linear pricing offer their customers the same price for each unit of a good or service. Anything else is nonlinear pricing. Nonlinear pricing in imperfect markets indicates a fundamental asymmetry in information between firms and consumers. Consumers are commonly expected to exhibit quality- or quantity-preference differences and have different reservation values for different product attributes. The firms, however, cannot observe consumers' preferences. When complete information regarding preferences is not observable, nonlinear pricing strategies with firms offering a menu or schedule of prices allow consumers to sort themselves according to their own preferences, resulting in market segmentation.