Three-Part Tariffs with Heterogeneous Users: Monopoly and Duopoly Cases

Abstract

Although two-part tariffs are widely studied, only three papers consider three-part tariffs, which consist of an access fee in return for an allowance consumption level along with a unit “overage” price for consumption beyond the allowance. Moreover, none of these papers addresses some elementary and fundamental questions concerning the optimal features of the tariff in the presence of heterogeneous users: (1) How does the overage price (and thus marginal benefit for a high-demand user) compare to the marginal cost of the service? (2) How does marginal benefit compare to marginal cost for a low-demand user consuming at the allowance level? (3) How large is the access fee relative to benefits from the service? The purpose of this paper is to answer these questions by using a simple model with two types of consumers and a constant marginal cost. The analysis is carried out for a monopoly provider and then for the duopoly case, with the outcomes under the two market structures compared.