Linear Tariffs Research Articles

Socio-economic determinants of pricing water for domestic use: A comparison of blocks and linear tariffs

This article explores a model in which an agency can adopt different tariff schemes (block tariff or linear tariff) for selling water to a domestic buyer (a household), considering socio-economic factors like household size and income level. Through the formulation and examination of a static game involving a buyer and an agency, where the latter considers also the buyer’s welfare in its decisions, the socio-economic determinants significantly affect the optimal pricing within each of the two suggested tariff schemes. This analysis leads to the identification of conditions under which the agency deems a block tariff more advantageous compared to a linear tariff, as well as circumstances where adopting a linear pricing strategy emerges as the optimal approach. By introducing a (discrete-time) dynamic extension of the model, in which the agency is assumed to operate as a boundedly rational agent, we investigate the role of the altruism that the agency decides to adopt toward the buyer, observing that it ends up affecting the price dynamics (defined by a gradient-like mechanism). In addition, we apply the model to the real case of the Apulia region in Italy, comparing the unit price currently applied in the region with the results of applying the model in the Apulian territory.

Optimal water tariffs for domestic, agricultural and industrial use

Consider a water supplier who determines sales rates with the goals of maximizing profits, protecting consumer welfare, and ensuring adequate future water supplies. Buyers are differentiated and can use the water for domestic, agricultural, and industrial purposes. We propose a leader-follower finite-horizon differential game. The leader (the water supplier) determines the selling price and the followers (consumers) react by requesting their optimal amount of water. We calculate a feedback Stackelberg equilibrium assuming that all user demand is satisfied (interior equilibrium). We compare two different tariff schemes: linear tariffs (the price paid is a multiple of the volume of water purchased), and increasing block tariffs (the unit price is lower for quantities of water that do not exceed a fixed threshold). We show that block pricing is never optimal and linear pricing is always preferred.

Vertical contracting between a vertically integrated firm and a downstream rival

Compared to linear tariffs, two-part tariffs are generally perceived as being more efficient since double marginalization is avoided. We investigate the efficiency of two-part tariffs vs. linear tariffs when a vertically integrated firm sells its input also to an independent downstream firm selling a differentiated substitute product. We find that a linear tariff can generate higher consumer surplus and overall welfare than a two-part tariff when the independent downstream firm is rather powerful in negotiating the contract terms, and downstream competition is in prices (Bertrand competition). In that case, the integrated firm makes more profits under a linear tariff than under a two-part tariff. In contrast, under downstream Cournot competition two-part tariffs are always welfare-superior. Under linear demand, we find that, irrespective of the mode of downstream competition and the distribution of bargaining power, the preferred contract type of the integrated firm is always welfare-superior.

Optimal tariffs with uncertainty and downstream fixed costs

We consider an upstream firm dealing with a downstream firm either via a two-part tariff or a linear tariff. The downstream firm faces demand uncertainty, it is risk-averse, and it must incur a fixed cost before demand realization. We show that when the fixed cost is relatively high, it is optimal for the supplier to subsidize part of it: such subsidization corresponds to a two-part tariff with negative fixed fee. In such case, the two-part tariff creates a stronger double-margin distortion than the linear tariff (no-subsidization scheme), and thus generates lower consumer surplus and total welfare.

Coordination of dual-channel supply chains with uncertain demand information

AbstractUncertain demand information increases the difficulty of decision-making in supply chains, especially in the light of inventory costs. This article researches a two-echelon dual-channel fresh agricultural product (FAP) supply chain, and discusses optimal decision-making and the value of information sharing using the Stackelberg game. To eliminate the double marginalization effect between supply chain parties, a two-part linear tariff contract is introduced for coordination. The results show that information sharing is always profitable for the manufacturer, but not for the retailer. The inventory and shortage costs will reduce the manufacturer's optimal pricing and fresh-keeping effort level. When the manufacturer overestimates the market demand predicted by the retailer, asymmetric information will increase the manufacturer’s inventory. The results provide important managerial implications for effective supply chain management.

The ambiguous competitive effects of passive partial forward ownership

AbstractIn a two‐tier industry with an upstream monopolist supplier and downstream competition with differentiated goods, we show that passive partial forward ownership (PPFO) has ambiguous effects on competition and welfare. When vertical trading is conducted via linear tariffs, PPFO is pro‐competitive and welfare‐increasing. While under two‐part tariffs, it is anti‐competitive and welfare‐decreasing. These hold irrespectively of the degree of product differentiation, the observability or not of contract terms, the mode of downstream competition, and the distribution of bargaining power between firms.

Observable Versus Unobservable Contracts in Duopolistic Competition

One upstream and two downstream firms are involved in a vertically related industry. Under observable contracts, firms are aware of both their own and their rival's input prices. However, under an unobservable contract, firms only know their own input price and are unaware of their rival’s input price. We demonstrate both vertical separation and vertical integration in the two contracts. We focus on two methods: linear tariffs and two-part tariffs. With linear tariffs and asymmetric costs under both observable contracts and unobservable contracts, vertical integration increases consumer surplus and social welfare. With separation linear tariffs and asymmetric costs, consumer surplus (social welfare) is lower (higher) under observable contracts than under unobservable contracts. With two-part tariffs, vertical integration does not affect (decreases) both consumer surplus and social welfare under observable contracts (under unobservable contracts). Under separation two-part tariffs, consumer surplus and social welfare are lower under observable two-part tariffs than under unobservable ones.

Asymmetric input contracts under price leadership

AbstractThis paper considers a vertically related industry where an upstream supplier simultaneously and independently negotiates linear tariffs with two asymmetrically capacity constrained downstream retailers endowed with (possibly) asymmetric bargaining powers over the purchase of an input. We introduce price leadership as the type of downstream competition. An increase in the upstream supplier’s bargaining power toward the large firm induces a positive externality on the small firm’s tariff. We also obtain that, a priori the small firm may end up (i) demanding a larger stock of the input and (ii) paying less for it. Our model also proves useful to show that the well‐known countervailing buyer power hypothesis could not hold because an integrated downstream firm might negotiate a better input price without any pass‐through to the final consumers. We mainly relate our analysis to the UK grocery market and to the recent empirical evidence regarding its functioning.

Mobile Telephony in Emerging Markets: The Importance of Dual-SIM Phones

Abstract A substantial share of customers in emerging markets use dual-SIM phones and subscribe to two mobile networks. A primary motive for so called multi-simming is to take advantage of cheap on-net services from both networks. In our modelling effort, we augment the seminal model of competing telephone networks á la Laffont, Rey and Tirole (1998b) by a segment of flexible price hunters that may choose to multi-sim. According to our findings, in equilibrium, the networks set a high off-net price in the linear tariffs to achieve segmentation. This induces the price hunters to multi-sim. We show that increased deployment of dual-SIM phones may induce a mixing equilibrium with high expected on-net prices. Thus, somewhat paradoxically, deployment of a technology that increases substitutability, and thereby competition, may end up raising prices.

The Ambiguous Competitive Effects of Passive Partial Forward Integration

In a two-tier industry with an upstream monopolist supplier and downstream competition with differentiated goods, we show that passive partial forward integration (PPFI) has ambiguous effects on competition and welfare. When vertical trading is conducted via linear tariffs, PPFI is pro-competitive and welfare-increasing. While under two-part tariffs, it is anti-competitive and welfare-decreasing. These hold irrespectively of the degree of product differentiation, the observability or secrecy of contract terms, the mode of downstream competition, and the distribution of bargaining power between firms.

Asymmetric Input Contracts with Price Leadership and Capacity Constraints

This paper considers a vertically related industry where an upstream supplier simultaneously negotiates with two downstream retailers endowed with (possibly) asymmetric bargaining powers, over the purchase of an input. Downstream firms have asymmetric capacities and downstream competition has a price leadership structure. Under linear tariffs, an increase in the upstream supplier's bargaining power towards the large firm induces a positive externality on the small firm's tariff. Under two-part tariff, instead, cross effects vanish. In both regimes, we obtain that, a priori the small firm may end up i) demanding a larger stock of the input and ii) paying less for it. Our model also proves useful to show that the well-known countervailing buyer power hypothesis may not hold because an integrated downstream firm might negotiate a better input price without any pass-through to the final consumers. We mainly relate our analysis to the UK grocery market and to the recent empirical evidence regarding its functioning.

Щодо особливостей договору чартеру (фрахтування) за цивільним законодавством України

У запропонованій статті визначається, що розвиток бізнесу, розширення міжнародних відносин вимагають від учасників мобільності й оперативності пересування, що не завжди забезпечується регулярним повітряним сполученням. Все це зумовило розвиток сегменту чартерних перевезень.
 Договором фрахтування судна називають як договір перевезення вантажів, пасажирів, багажу, якщо він укладений з умовою надання для перевезення всього судна або окремих суднових приміщень, так і договір оренди судна з екіпажем або без нього. І в тому, і в іншому випадку сторони можуть називатися однаково -«фрахтувальник (судновласник)» і «фрахтувальник», предмет договору - переміщення певних обумовлених об'єктів (вантажів, пасажирів, багажу) може бути один і той самий.
 Акцентується увага на тому, що договір фрахтування (чартер) є двостороннім і оплатним, зміст якого полягає у праві фрахтувальника зарезервувати все обумовлене договором судно, інший транспортний засіб (частину його місткості) для перевезення за плату протягом одного або декількох рейсів, передбачених цим договором вантажів, пасажирів і багажу, а фрахтувальника - отримати за наданий транспортний засіб (частину його місткості) встановлену угодою сторін плату (іменовану в морському праві фрахтом).
 Пропонується виділяти такі ознаки лінійного судноплавства: 1) регулярність повідомлення і наявність розкладу судів; 2) перевезення дорогих генеральних вантажів; 3) завантаження судна вантажами багатьох вантажовідправників; 4) оплата перевезення за лінійними тарифами; 5) здійснення вантажно-розвантажувальних операцій перевізником; 6) публічний характер послуг перевізника.
 Водночас українське право застосовує поняття «договір фрахтування» виключно до перевезення вантажів, пасажирів, багажу. Всі інші форми експлуатації суден є договором оренди судна як транспортного засобу.
 Чартер зазвичай розрахований на перевезення великих партій масових вантажів, тому її умовою виступає надання всього судна, його частини або певних суднових приміщень.
 Звертається увага на те, що, хоча відносини фрахтування (чартеру) в морському праві детально регламентовані на законодавчому рівні, чинне законодавство України в цій сфері не є досконалим.

On the Dynamics of Distributed Energy Adoption: Equilibrium, Stability, and Limiting Capacity

The death spiral hypothesis in electric utility represents a positive feedback phenomenon in which a regulated utility is driven to financial instability by rising prices and declining demand. We establish conditions for the existence of death spiral and conditions of stable adoption of distributed energy resources. We show in particular that linear tariffs always induce death spiral when the fixed operating cost of the utility rises beyond a certain threshold. For two-part tariffs with connection and volumetric charges, the Ramsey pricing that optimizes myopically social welfare subject to the revenue adequacy constraint induces a stable equilibrium. The Ramsey pricing, however, inhibits renewable adoption with a high connection charge. In contrast, a two-part tariff with a small connection charge results in a stable adoption process with a higher level of renewable adoption and greater long-term total consumer surplus. Market data are used to illustrate various solar adoption scenarios.

On the welfare effects of vertical integration: Opportunism vs. double marginalization

We investigate the welfare effects of vertical integration by an upstream supplier dealing with two downstream firms through secret linear tariffs. We show that whether vertical integration is anti- or procompetitive depends on the distribution of the bargaining power between firms in the pre-integration case. In particular, when the supplier has all, or at least, higher bargaining power than downstream firms, vertical integration is socially desirable. On the contrary, when downstream firms have all, or at least, higher bargaining power than the supplier, integration is detrimental to society.

Electricity auctions in the presence of transmission constraints and transmission costs

Electricity markets are moving through integration around the world. However, our understanding of those markets is still limited. I characterize the Bertrand equilibrium in a discriminatory-price electricity auction when suppliers submit a single offer price for their entire production capacity and they face transmission constraints and linear tariffs for the injection of electricity into the grid. With point of connection tariffs, which are used in the majority of the European countries, suppliers pay a tariff for the total electricity injected into the grid. In contrast, with transmission tariffs, suppliers only pay a tariff for the electricity sold in the other market. Transmission tariffs outperform point of connection tariffs by maximizing consumers' welfare and transmission efficiency. The consequences of an increase in transmission capacity differ considerably depending on the tariff. If the transmission tariffs are zero, an increase in transmission capacity is pro-competitive. In contrast, if the transmission tariffs are positive, an increase in transmission capacity is pro-competitive only when the transmission capacity is low.

On the Efficiency of Connection Charges—Part I: A Stochastic Framework

This two-part paper addresses the design of retail electricity tariffs for distribution systems with distributed energy resources such as solar power and storage. In particular, the optimal design of dynamic two-part tariffs for a regulated monopolistic retailer is considered, where the retailer faces exogenous wholesale electricity prices and fixed costs on the one hand and stochastic demands with intertemporal price dependencies on the other. Part I presents a general framework and analysis for revenue adequate retail tariffs with advanced notification, dynamic prices, and uniform connection charges. It is shown that the optimal two-part tariff consists of a dynamic price that may not match the expected wholesale price and a connection charge that distributes uniformly among all customers the retailer's fixed costs and a price-volume risk premium. A sufficient condition for the optimality of the derived two-part tariff among the class of arbitrary ex-ante tariffs is obtained. Numerical simulations quantify the substantial welfare gains that the optimal two-part tariff may bring compared to the optimal linear tariff (without connection charge). Part II focuses on the impact of two-part tariffs on the integration of distributed energy resources.

Vertical foreclosure and multi-segment competition

This paper analyzes a supplier’s incentives to foreclose downstream entry when entrants have stronger positions in different market segments, thus bringing added value as well as competition. We first consider the case where wholesale contracts take the form of linear tariffs, and characterize the conditions under which the competition-intensifying effect dominates, thereby leading to foreclosure. We then show that foreclosure can still occur with non-linear tariffs, even coupled with additional provisions such as resale price maintenance.

Profit-Improving Linear Tariffs Pricing in a Vertical Oligopoly

Considering the interplay between intra-firms (own retailing firms) and inter-firms (rival retailing firms) competition in vertically related markets, we compare linear tariffs and two-part tariffs pricing. In contrast to previous results, we show that when both products are sufficiently close substitutes, there is a threshold level of the number of retailing firms, beyond which each manufacturing firm’s profits are larger under linear tariffs pricing than under two-part tariffs pricing. It shows the contradictions to the conventional wisdom that two-part tariffs pricing is always better than linear tariffs pricing from the viewpoint of manufacturing firms. We also show that the wholesale prices increase as the number of retailing firms increases under two-part tariffs pricing, regardless of the degree of product substitutability.

Sufficient statistics for tariff reform when revenue matters

What kinds of tariff reform are likely to raise welfare in situations where tariff revenue is important? General conditions for welfare to rise without reducing tariff revenue are opaque. We show that they can be greatly simplified using a small number of sufficient statistics, primarily the generalized mean and variance of tariffs. We present sufficient conditions for a class of linear tariff reform rules that guarantee higher welfare without a loss in revenue. The rules consist of convex combinations of (i) trade-weighted-average-tariff-preserving cuts in dispersion; and (ii) uniform tariff cuts that preserve domestic relative prices among tariff-ridden goods.

The strength of the waterbed effect depends on tariff type

We show that the waterbed effect, i.e. the pass-through of a change in one price of a firm to its other prices, is much stronger if the latter include subscription rather than only usage fees. In particular, in mobile network competition with a fixed number of customers, the waterbed effect is full under two-part tariffs, while it is only partial under linear tariffs.