Class Pricing

A contract with K-class pricing divides a large set of goods or services into K classes and assigns a single price to any element of a class. While the literature has emphasized rationales based on screening, this paper looks at the implications of costly pricing. My analysis suggests that class pricing is more likely to be used when the number of buyers is smaller, the number of versions is larger, the variance in costs is smaller, and demand ex ante differs less between versions. Under simple conditions classes should be designed to minimize the sum of squared within-class cost deviations. In bilateral trades, the most efficient game form is that in which classes are designed by the player with fewer varied gains from trade, while the traded version is chosen by the other player. Decisions are thus made by the player who cares most about them, while the opponent prescribes a set of limits.