Competition and Two-Part Tariffs

Abstract

Monopoly power-of some sort-is thought to have viewed two-part . . ~~~~~~~~~tariffs as price-discrimibe a necessary condition for a firm to have the nation devices, empower to price discriminate. For example, a firm ployed exclusively by prefers to use a two-part tariff (see Oi 1971) firms with market rather than charge a single price for output. power. This paper ofHowever, a competing firm could always charge fers an explanation for the use of such price a single price that consumers would prefer and schedules by firms in earn nonnegative profits. Thus it seems that the highly competitive marexistence of competition in a market would result kets, such as health in the elimination of any two-part tariff. Howclubs. It is argued that, ever, the existence of two-part tariffs in many in a world with buyer markets that are (or appear to be) competitive uncertainty about future demands, they can belies this standard assumption. This paper exprovide insurance for plains why monopoly power is not required for risk-averse buyers. The the existence of a two-part tariff. I show circumfixed entry fee finances stances in which price discrimination using a a marginal price below marginal cost. It is two-part tariff is preferred by consumers to a sinshown that the benefits gle price and therefore why this pricing method from this lower price will be found in competitive markets. Such pricwill, under certain ing occurs in environments with uncertainty bespecified conditions, cause two-part tariffs act as a form of insurance. outweigh the costs of Ex ante consumers plan consumption; however, the entry fee. there is a random component to their consump-