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Equilibrium two-part cost structures

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  • Engelbert Dockner

Abstract

We consider an oligopolistic product market in which two competing firms instead of paying a competitive input price choose a two-part tariff. Costs for the input are divided up into upfront fixed costs independent of the output level and reductions in marginal costs. We explore under which competitive settings will such a two-part cost structure correspond to equilibrium behavior in a two stage game. We find that firms in a static model do have an incentive to choose a two-part cost structure when competition in the product market is not too strong and oligopoly rents can be shifted form the rival to the own firm. In a dynamic market when firms use Markov strategies competition is so intense that there are no rents to be shifted and firms do not benefit from two-part cost structures. Copyright Springer-Verlag 2010

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  • Engelbert Dockner, 2010. "Equilibrium two-part cost structures," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 18(4), pages 525-537, December.
    • Handle: RePEc:spr:cejnor:v:18:y:2010:i:4:p:525-537
    DOI: 10.1007/s10100-010-0177-0
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    1. Ordover, Janusz A & Panzar, John C, 1982. "On the Nonlinear Pricing of Inputs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(3), pages 659-675, October.
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    Cited by:

    1. Richard Hartl & Ulrike Leopold-Wildburger & Marion Rauner & Gerhard Sorger & Gernot Tragler & Vladimir Veliov, 2010. "Editorial “In honor of Gustav Feichtinger”," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 18(4), pages 433-435, December.

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