Two-Part Tariff Competition in Duopoly
School of Business Discussion Papers, Series A 00.11, La Trobe University
33 Pages Posted: 7 Dec 2000
This paper investigates the market equilibrium and welfare effects of two-part tariff competition. When consumers are uniformly distributed on a Hotelling line, equilibrium prices are equal to marginal costs if and only if the demand of the marginal consumer is equal to the average demand. Entry fees are socially optimal in a symmetric equilibrium if all consumers participate in the market. In comparison with uniform pricing, two-part tariffs tend to have lower prices, higher profits and social welfare. In the logit model, marginal cost pricing holds but entry fees are higher than the social optimum. Two-part tariffs also lead to lower aggregate net consumer surplus but higher profits than uniform pricing.
Keywords: Oligopoly, Two-Part Tariff, Cartelization
JEL Classification: D21, D42, D43, L11, L12, L13
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