Risk-Averse Firm and Two-Part Tariffs

34 Pages Posted: 8 May 2010

See all articles by Xiangkang Yin

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Date Written: May 5, 2010


Under demand uncertainty, a risk-averse firm adopts marginal-cost pricing when consumers are homogenous. When consumers are heterogeneous, the equilibrium price tends to move towards marginal cost as the firm’s risk aversion increases and it equates marginal cost if the firm is infinitely risk averse. Two-part pricing yields a lower risk cost than linear pricing or even completely eliminates the risk. Under cost uncertainty the firm charges a risk premium and the equilibrium price monotonically rises as the firm’s risk aversion increases. However, the risk premium is likely to reflect the risk cost the firm bears rather than rent seeking.

Keywords: Monopoly, Two-Part Tariff, Risk Aversion

JEL Classification: D21, D42, L11, L12

Suggested Citation

Yin, Xiangkang, Risk-Averse Firm and Two-Part Tariffs (May 5, 2010). Available at SSRN: https://ssrn.com/abstract=1601040 or http://dx.doi.org/10.2139/ssrn.1601040

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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