Risk-Averse Seller and Two-Part Tariffs

Abstract

Under demand uncertainty, a risk-averse seller adopts marginal-cost pricing when clients are homogenous. When the clients are heterogeneous, the optimal unit price tends to move towards marginal cost as the seller’s risk aversion increases and equals marginal cost if the seller is infinitely risk averse. Two-part pricing yields a lower risk cost than linear pricing and can even eliminate risk costs. Under cost uncertainty the seller charges a risk premium with the optimal unit price monotonically increasing as the seller becomes more risk averse. Such a price increase is usually harmful to buyers.

Keywords: Monopoly, Two-Part Tariff, Risk Aversion

JEL Classification: D21, D42, L11, L12