Two-Tier Pricing of Shared Facilities in a Free-Entry Equilibrium

Abstract

We explore how well the market will provide shared facilities which are subject to congestion. It is usually efficient to have multiple facilities because it is more efficient to spend resources on facilities than to endure crowding costs. We assume firms can charge a membership price and a visit price. We present a symmetric Nash equilibrium in these two prices. We show that ifthe number offirms is large, the membership price will be small. Thus, the membership price is a measure of market power. When entry occurs in response to positive profit (but such that entry is deterred by the prospect of negative profit in a symmetric Nash equilibrium), the endogenous number offirms is bounded below by one fewer than the efficient number. Thefees paid by a client converge to an appropriately defined competitive price as the economy is replicated.