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Two-part pricing, consumer heterogeneity and Cournot competition

Jensen, Sissel; Sørgard, Lars
Working paper
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URI
http://hdl.handle.net/11250/162714
Date
2001
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  • Discussion papers (SAM) [675]
Abstract
We analyze two-part tariffs in an oligopoly, where each firm commits to

a quantity and a fixed fee prior to the determination of unit prices. In the

case of homogeneous consumers, Harrison and Kline (2001) showed that

the equilibrium involves marginal cost pricing and that increased competition

affects industry profit and the tariff structure solely by reducing the

fixed fee. We show that firms’ pricing strategies may change when we allow

for demand side heterogeneity. In particular, we find that the price per unit

can be either above or below marginal cost, and that the fixed fee increases

with increased competition. Finally, some numerical examples show that

full market coverage may arise as an equilibrium feature in cases where a

monopolist would exclude low-demand types. Hence, fostering competition

may contribute to the fulfillment of the Universal Service requirement

that is common in industries such as telecommunications, which applies nonlinear pricing on a normal basis.
Description
Revised March 2005
Publisher
Norwegian School of Economics and Business Administration. Department of Economics
Series
Discussion paper
2001:20

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