Mixing goods with two-part tariffs

Abstract

We consider a market where consumers mix goods offered by two firms differentiated a la Hotelling, and show how tariff structures affect consumers, profits, and location decisions. As compared to linear pricing, when firms charge two-part tariffs they make higher profits while consumers are worse off. The resulting allocation is not efficient since firms choose extreme locations and too little mixing occurs. Still, under competition in flat subscription fees only there is no mixing at all, and the outcome is Pareto-dominated by competition in the other types of tariffs. Results are discussed with a particular emphasis on the media industry.