Optimal Tariffs with Uncertainty and Downstream Fixed Costs

10 Pages Posted: 8 May 2023

See all articles by Christos Constantatos

Christos Constantatos

affiliation not provided to SSRN

Ioannis Pinopoulos

National and Kapodistrian University of Athens - Department of Economics

Abstract

We consider an upstream firm dealing with a downstream firm either via a two-part tariff or a linear tariff. The downstream firm faces demand uncertainty, it is risk-averse, and it must incur a fixed cost before demand realization. We show that when the fixed cost is relatively high, it is optimal for the supplier to subsidize part of it: such subsidization corresponds to a two-part tariff with negative fixed fee. In such case, the two-part tariff creates a stronger double-margin distortion than the linear tariff (no-subsidization scheme), and thus generates lower consumer surplus and total welfare.

Keywords: Uncertainty, bilateral monopoly, vertical tariffs, fixed costs

Suggested Citation

Constantatos, Christos and Pinopoulos, Ioannis, Optimal Tariffs with Uncertainty and Downstream Fixed Costs. Available at SSRN: https://ssrn.com/abstract=4441538 or http://dx.doi.org/10.2139/ssrn.4441538

Christos Constantatos

affiliation not provided to SSRN ( email )

No Address Available

Ioannis Pinopoulos (Contact Author)

National and Kapodistrian University of Athens - Department of Economics ( email )

1, Sofokleous Str
Athens, GR- 10559
Greece

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