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On two-part tariff competition in a homogeneous product duopoly

  • Griva, Krina
  • Vettas, Nikolaos

We explore the nature of two-part tariff competition between duopolists providing a homogeneous service when consumers differ with respect to their usage rates. Competition in only one price component (the fixed fee or the rate) may allow both firms to enjoy positive profits if the other price component has been set at levels different enough for each firm. Endogenous market segmentation emerges, with the heavier users choosing the lower rate firm and the lighter users choosing the lower fee firm. We therefore characterize how fixing one price component indirectly introduces an element of product differentiation to an otherwise homogeneous product market. We also examine the crucial role that non-negativity constraints play for the nature of market equilibrium.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9106.

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Date of creation: Aug 2012
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Handle: RePEc:cpr:ceprdp:9106
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  1. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer.
  2. Spulber, Daniel F, 1981. "Spatial Nonlinear Pricing," American Economic Review, American Economic Association, vol. 71(5), pages 923-33, December.
  3. Harrison, M. & Kline, J.J., 1998. "Quantity Competition With Access Fees," Papers 358, Australian National University - Department of Economics.
  4. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  5. Steffen Hoernig & Tommaso Valletti, 2006. "Mixing Goods with Two-Part Tariffs," CEIS Research Paper 72, Tor Vergata University, CEIS.
  6. Mark Armstrong & John Vickers, 2010. "Competitive Non-linear Pricing and Bundling," Review of Economic Studies, Oxford University Press, vol. 77(1), pages 30-60.
  7. Stole, Lars A, 1995. "Nonlinear Pricing and Oligopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 529-62, Winter.
  8. Saggi, Kamal & Vettas, Nikolaos, 1999. "On Intrabrand and Interbrand Competition: The Strategic Role of Fees and Royalties," CEPR Discussion Papers 2110, C.E.P.R. Discussion Papers.
  9. Jean-Charles Rochet & Lars A. Stole, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 277-311.
  10. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
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