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Three-Part Tariffs with Heterogeneous Users: Monopoly and Duopoly Cases

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  • Ji Baek
  • Jan Brueckner

Abstract

Although two-part tariffs are widely studied, only three papers consider three-part tariffs, which consist of an access fee in return for an allowance consumption level along with a unit “overage” price for consumption beyond the allowance. Moreover, none of these papers addresses some elementary and fundamental questions concerning the optimal features of the tariff in the presence of heterogeneous users: (1) How does the overage price (and thus marginal benefit for a high-demand user) compare to the marginal cost of the service? (2) How does marginal benefit compare to marginal cost for a low-demand user consuming at the allowance level? (3) How large is the access fee relative to benefits from the service? The purpose of this paper is to answer these questions by using a simple model with two types of consumers and a constant marginal cost. The analysis is carried out for a monopoly provider and then for the duopoly case, with the outcomes under the two market structures compared. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Ji Baek & Jan Brueckner, 2015. "Three-Part Tariffs with Heterogeneous Users: Monopoly and Duopoly Cases," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(2), pages 155-165, September.
    • Handle: RePEc:kap:revind:v:47:y:2015:i:2:p:155-165
    DOI: 10.1007/s11151-015-9471-2
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    References listed on IDEAS

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    1. Yin, Xiangkang, 2004. "Two-part tariff competition in duopoly," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 799-820, June.
    2. Farid Gasmi & Michel Moreaux & William Sharkey, 2000. "Strategic nonlinear pricing," Journal of Economics, Springer, vol. 71(2), pages 109-131, June.
    3. Harrison, Mark & Kline, J. Jude, 2001. "Quantity competition with access fees," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 345-373, March.
    4. Arun Sundararajan, 2003. "Nonlinear pricing of information goods," Industrial Organization 0307003, University Library of Munich, Germany.
    5. Arun Sundararajan, 2004. "Nonlinear Pricing of Information Goods," Management Science, INFORMS, vol. 50(12), pages 1660-1673, December.
    6. Anja Lambrecht & Katja Seim & Bernd Skiera, 2007. "Does Uncertainty Matter? Consumer Behavior Under Three-Part Tariffs," Marketing Science, INFORMS, vol. 26(5), pages 698-710, 09-10.
    7. Jensen, S. & Sorgard, L., 2001. "Two-Part Tariffs, Consumer Heterogeneity and Cournot Competition," Papers 20/2001, Norwegian School of Economics and Business Administration-.
    8. Adib Bagh & Hemant K. Bhargava, 2013. "How to Price Discriminate When Tariff Size Matters," Marketing Science, INFORMS, vol. 32(1), pages 111-126, August.
    9. Walter Y. Oi, 1971. "A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 85(1), pages 77-96.
    10. Yong Chao, 2013. "Strategic Effects Of Three‐Part Tariffs Under Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54, pages 977-1015, August.
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    6. Masahiro Watabe, 2016. "A characterization of implementability of decision rules via a menu of three-part tariffs," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 6(3), pages 459-479, December.

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