IDEAS home Printed from https://ideas.repec.org/a/eee/ecolet/v230y2023ics0165176523002859.html

Optimal tariffs with uncertainty and downstream fixed costs

Author

Listed:
  • Constantatos, Christos
  • Pinopoulos, Ioannis N.

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.

Suggested Citation

  • Constantatos, Christos & Pinopoulos, Ioannis N., 2023. "Optimal tariffs with uncertainty and downstream fixed costs," Economics Letters, Elsevier, vol. 230(C).
    • Handle: RePEc:eee:ecolet:v:230:y:2023:i:c:s0165176523002859
    DOI: 10.1016/j.econlet.2023.111260
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165176523002859
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econlet.2023.111260?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Richard J. Gilbert, 2015. "E-Books: A Tale of Digital Disruption," Journal of Economic Perspectives, American Economic Association, vol. 29(3), pages 165-184, Summer.
    2. Markus Reisinger & Monika Schnitzer, 2012. "Successive Oligopolies with Differentiated Firms and Endogeneous Entry," Journal of Industrial Economics, Wiley Blackwell, vol. 60(4), pages 537-577, December.
    3. Rey, Patrick & Tirole, Jean, 1986. "The Logic of Vertical Restraints," American Economic Review, American Economic Association, vol. 76(5), pages 921-939, December.
    4. Kate Ho & Robin S. Lee, 2017. "Insurer Competition in Health Care Markets," Econometrica, Econometric Society, vol. 85, pages 379-417, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Roman Inderst & Fabian Griem & Greg Shaffer, 2025. "Bundling and Line Extensions in Distribution Channels," Management Science, INFORMS, vol. 71(7), pages 6184-6203, July.
    2. Frago Kourandi & Ioannis N. Pinopoulos, 2024. "Vertical contracting between a vertically integrated firm and a downstream rival," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 78(1), pages 181-217, August.
    3. Nocke, Volker & Rey, Patrick, 2018. "Exclusive dealing and vertical integration in interlocking relationships," Journal of Economic Theory, Elsevier, vol. 177(C), pages 183-221.
    4. Soheil Ghili & Matthew Schmitt, 2018. "Risk Aversion and Double Marginalization," Cowles Foundation Discussion Papers 2144, Cowles Foundation for Research in Economics, Yale University.
    5. Papadopoulos, Konstantinos G. & Petrakis, Emmanuel & Skartados, Panagiotis, 2021. "The ambiguous competitive effects of passive partial forward integration," UC3M Working papers. Economics 33354, Universidad Carlos III de Madrid. Departamento de Economía.
    6. Pinopoulos, Ioannis N., 2019. "On the welfare effects of vertical integration: Opportunism vs. double marginalization," Economics Letters, Elsevier, vol. 174(C), pages 169-172.
    7. Inderst, Roman & Griem, Fabian & Schaffer, Greg, 2022. "Tying under Double-Marginalization," CEPR Discussion Papers 17314, Centre for Economic Policy Research.
    8. Leda Maria Bonazzi & Raffaele Fiocco & Salvatore Piccolo, 2021. "Vertical Price Restraints and Free Entry Under Asymmetric Information," Journal of Industrial Economics, Wiley Blackwell, vol. 69(4), pages 854-899, December.
    9. Daniel Herold, 2017. "Information Exchange in Retail Markets with Uncertainty about Downstream Costs," MAGKS Papers on Economics 201750, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    10. Wouters, Olivier J. & Cylus, Jonathan & Yang, Wei & Thomson, Sarah & McKee, Martin, 2016. "Medical savings accounts: assessing their impact on efficiency, equity, and financial protection in health care," LSE Research Online Documents on Economics 65448, London School of Economics and Political Science, LSE Library.
    11. Shohei Yoshida, 2018. "Bargaining power and firm profits in asymmetric duopoly: an inverted-U relationship," Journal of Economics, Springer, vol. 124(2), pages 139-158, June.
    12. Johannes Münster & Markus Reisinger, 2021. "Sequencing Bilateral Negotiations with Externalities," ECONtribute Discussion Papers Series 096, University of Bonn and University of Cologne, Germany.
    13. Xulia González, 2015. "Empirical Regularities in the Vertical Restraints of Manuacturing Firms," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 43(2), pages 181-194, June.
    14. Ippolito, Pauline M & Overstreet, Thomas R, Jr, 1996. "Resale Price Maintenance: An Economic Assessment of the Federal Trade Commission's Case against the Corning Glass Works," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 285-328, April.
    15. Josh Feng & Luca Maini, 2024. "Demand Inertia and the Hidden Impact of Pharmacy Benefit Managers," Management Science, INFORMS, vol. 70(12), pages 8940-8961, December.
    16. Yinliang (Ricky) Tan & Janice E. Carrillo, 2017. "Strategic Analysis of the Agency Model for Digital Goods," Production and Operations Management, Production and Operations Management Society, vol. 26(4), pages 724-741, April.
    17. Craig, Stuart V. & Ericson, Keith Marzilli & Starc, Amanda, 2021. "How important is price variation between health insurers?," Journal of Health Economics, Elsevier, vol. 77(C).
    18. Teck-Hua Ho & Juanjuan Zhang, 2008. "Designing Pricing Contracts for Boundedly Rational Customers: Does the Framing of the Fixed Fee Matter?," Management Science, INFORMS, vol. 54(4), pages 686-700, April.
    19. Ingene, Charles A. & Parry, Mark E. & Xu, Zibin, 2020. "Resale Price Maintenance: Customer Service Without Free Riding," Journal of Retailing, Elsevier, vol. 96(4), pages 563-577.
    20. Benjamin Handel & Nianyi Hong & Lynn M. Hua & Yuki Ito, 2023. "Employer risk‐adjustment transitions with inertial consumers: Evidence from CalPERS," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 90(1), pages 93-121, March.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L17 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Open Source Products and Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolet:v:230:y:2023:i:c:s0165176523002859. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolet .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.