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 significantly: compared to the benchmark without costly entry, in our model both quality distortion and market exclusion are reduced, sorting is more likely, and whenever bunching oc-curs, the bunching interval is necessarily smaller. Additionally, under certain conditions the monopoly solution may even achieve the first best (i.e., production efficiency). We also demonstrate that the op-timal monopoly solutions 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