Monopolistic Nonlinear Pricing with Costly Information Acquisition∗

We consider costly information acquisition in the canonical monopolistic nonlinear pricing model (Mussa and Rosen, 1978; Maskin and Riley, 1984) so that consumers need to incur privately known entry costs in order to learn their preference “intensities” for the quality of the product. We show that by taking into account costly information acquisition, the nature of optimal nonlinear pricing contracts changes dramatically: both quality distortion and market exclusion are reduced compared to the Mussa-Rosen benchmark, and the monopolistic solution may even achieve the first best. We identify conditions under which the monopolistic solution involves quality distortion or no distortion. Also, when the monopolist can charge entry fees, we show that the optimal monopolistic solution is always the first best. Despite the possibility of production efficiency (no quality distortion), the monopolist always induces insufficient entry compared to socially efficient entry.