Implementation of Competitive Nonlinear Pricing: Tariffs with Inclusive Consumption

Posted: 10 May 2006

See all articles by Sissel Jensen

Sissel Jensen

Norwegian School of Economics (NHH) - Department of Economics

Abstract

The paper studies how the optimal nonlinear quantity-payment allocation can be truthfully implemented by optional tariffs in a differentiated goods duopoly. Consumers choose from a menu of tariffs and are subsequently billed according to this. We find that implementation by simple two part tariffs may not be a feasible strategy in a duopoly because the optimal nonlinear tariff exhibits a convexity for lower quantities. We show that the optimal outcome can be implemented if the firms can use two part tariffs with inclusive consumption. The fixed fee includes a free consumption allowance, whereas subsequent consumption is charged according to a steep unit price. That way the firm is able to secure voluntary participation without violating the incentive constraint. The paper show some examples from the telecommunications industry where firms offer two part tariffs with free call minutes to low demand segments.

Keywords: Price discrimination, nonlinear pricing, implementation, multi-part tariffs

JEL Classification: D82, L96, L13

Suggested Citation

Jensen, Sissel, Implementation of Competitive Nonlinear Pricing: Tariffs with Inclusive Consumption. Review of Economic Design, Forthcoming, Available at SSRN: https://ssrn.com/abstract=900309

Sissel Jensen (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
465
PlumX Metrics