Risk-Averse Firms and Two-Part Tariffs under Uncertainty

42 Pages Posted: 13 Nov 2008

See all articles by Xiangkang Yin

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Date Written: November 12, 2008


This paper studies two-part tariffs with explicit consideration of cost uncertainty and risk aversion. It finds that firms charge a risk premium over expected marginal cost for each unit they sell. This pricing rule is socially optimal if and only if the modeled market is fully covered in equilibrium. A risk-averse monopoly tends to generate less aggregate net consumer surplus than a risk-neutral monopoly in partial-cover equilibrium but consumer welfare is indifferent when the market is fully covered. In oligopoly, consumer welfare increases (decreases) in the Arrow-Pratt measure of absolute risk aversion when the number of firms is relatively large (small).

Keywords: Monopoly, Oligopoly, Two-Part Tariff, Risk Aversion

JEL Classification: D21, D42, D43, L11, L12, L13

Suggested Citation

Yin, Xiangkang, Risk-Averse Firms and Two-Part Tariffs under Uncertainty (November 12, 2008). Available at SSRN: https://ssrn.com/abstract=1300157 or http://dx.doi.org/10.2139/ssrn.1300157

Xiangkang Yin (Contact Author)

Deakin University ( email )

Melbourne, Victoria

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

HOME PAGE: http://www.firn.org.au

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