Optimal nonlinear pricing by a regret-averse monopoly

This paper examines the optimal nonlinear pricing by a monopolist who sells a good to two types of buyers with high and low valuation. The monopolist's preferences are characterized by a modified utility function that includes disutility from having chosen ex-post suboptimal alternatives. Regret aversion is shown to affect the rent extraction-efficiency tradeoff. When buyers are more likely to have high (low) valuation, the regret-averse monopolist reduces (enlarges) the downward distortion on the second-best quantity offered to low-valuation buyers, thereby resulting in lower (higher) unit prices paid by all buyers. The regret-averse monopolist always earns a lower expected profit.