Incentive consistency and the choice of a spatial pricing mode

This paper extends Gronberg and Meyer’s results (1981 21:541–549) and studies the problem that occurs when transportation costs are different between a firm and consumers: The firm (based on a profit-maximizing consideration) may adopt discriminatory pricing with an inefficient transport mode. This inefficient pricing behavior may not be consistent with the social optimum, whereby the problem of incentive inconsistency thus occurs. When dealing with endogenous pricing modes having asymmetric transportation costs, one should pay more attention to the distortion caused by the inconsistency problem.