Monopolistic nonlinear pricing with consumer entry

We consider consumer entry in the canonical monopolistic nonlinear pricing model ( Mussa and Rosen 1978) wherein consumers learn their preference “types” after incurring privately known entry costs. We show that by taking into account consumer entry, the nature of optimal nonlinear pricing contracts changes signif- icantly: compared to the benchmark without costly entry, in our model both qual- ity distortion and market exclusion are reduced, sorting is more likely, and when- ever bunching occurs, the bunching interval is necessarily smaller. Additionally, under certain conditions the monopoly solution may even achieve the ?rst best (i.e., production ef?ciency). We also demonstrate that the optimal monopoly so- lutions can be ranked according to inverse hazard rate functions of the entry cost, which suggests an interesting dynamic for monopolistic nonlinear pricing with consumer entry.