Nonlinear Pricing Under Regulation: Comparing Portion Cap Rules and Taxes in the Laboratory

With Steven Wu and Joseph Balagtas.

We report an experiment contrasting the impacts of a tax and a cap rule in a market with privately-informed buyers. Relying on standard nonlinear pricing theory, we evaluate the degree to which consumer choice and well-being are impacted by these measures. In our experiment, single-product sellers face demand from two types of buyers with private preferences. We manipulate the policy environment across treatments. With regulations, we aim to reduce the size of the large option by about half the original large quantity. Compared to the regulation-free baseline, sellers facing a cap attempt to separate types with similar frequency. With a tax, subjects are less likely to offer menus with two alternatives. Additionally, we find that consumer surplus remains unaffected under a cap rule, while buyers with high willingness to pay for the product see their surplus diminished by the tax. These results have implications for policy making in the food retail industry and others where authorities aim to regulate consumption while protecting consumer surplus.