In this chapter, we start by emphasizing the difference between menu pricing and group pricing (Section 9.1). We then provide a formal analysis of menu pricing by a monopolist. We derive the conditions under which menu pricing leads to higher profits than uniform pricing; we also perform the same analysis in terms of welfare (Section 9.2). Finally, we turn to the analysis of menu pricing in oligopolistic settings; we consider in turn quality-and quantity-based menu pricing (Section 9.3).

Menu pricing versus group pricing

The previous chapter described situations where the sellers are able to infer their buyers' willingness to pay from some observable and verifiable characteristics of those buyers (like age, gender, location, etc.). In many situations, however, there exists no such reliable indicator of the buyers' willingness to pay. How much a consumer is willing to pay is their private information. The only way for a seller to extract more consumer surplus is then to bring the consumer to reveal this private information. To achieve this goal, the seller must offer his product under a number of ‘packages’ (i.e., some combinations of price and product characteristics). The key is to identify some dimensions of the product that are valued differently across consumers, and to design the product line so as to emphasize differences along those dimensions. The next step consists in pricing the different versions in such a way that consumers will sort themselves out by selecting the version that most appeals to them.