Two-Part Pricing, Consumer Heterogeneity and Cournot Competition

32 Pages Posted: 10 May 2006

See all articles by Sissel Jensen

Sissel Jensen

Norwegian School of Economics (NHH) - Department of Economics

Lars Sorgard

Norwegian School of Economics and Business Administration (NHH); Norwegian School of Economics (NHH) - Department of Economics

Date Written: April 2005

Abstract

We analyze two-part tariffs in an oligopoly, where each firm commits to a quantity and a fixed fee prior to the determination of unit prices. In the case of homogeneous consumers, Harrison and Kline (2001) showed that the equilibrium involves marginal cost pricing and that increased competition affects industry profit and the tariff structure solely by reducing the fixed fee. We show that firms' pricing strategies may change when we allow for demand side heterogeneity. In particular, we find that the price per unit can be either above or below marginal cost, and that the fixed fee increases with increased competition. Finally, some numerical examples show that full market coverage may arise as an equilibrium feature in cases where a monopolist would exclude low-demand types. Hence, fostering competition may contribute to the fulfillment of the Universal Service requirement that is common in industries such as telecommunications, which applies nonlinear pricing on a normal basis.

Keywords: Oligopoly, Two-part tariff, Cournot

JEL Classification: L11, L13, D82

Suggested Citation

Jensen, Sissel and Sorgard, Lars, Two-Part Pricing, Consumer Heterogeneity and Cournot Competition (April 2005). Available at SSRN: https://ssrn.com/abstract=900306 or http://dx.doi.org/10.2139/ssrn.900306

Sissel Jensen (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

Lars Sorgard

Norwegian School of Economics and Business Administration (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway
+47 5 595 9723 (Phone)
+47 5 595 9543 (Fax)

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

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