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Two part tariffs with partial product bundling

Jensen, Sissel
Working paper
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URI
http://hdl.handle.net/11250/162838
Date
2001
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  • Discussion papers (SAM) [578]
Abstract
When a firm operates in an industry with very large differences in

consumers' willingness to pay for the service it offers, it faces a challenge in

the pricing decision. It wants to engage in price discrimination, but cannot

identify a given consumer's market segment ex ante. When consumers'

willingness to pay is private information, a widely used sorting mechanism

is to offer a menu of two part tariffs, letting high demand and low demand

consumers self-select into distinct market segments by their tariff choice.

However, when the difference in consumers' willingness to pay is very large,

simple two part tariffs are not longer sufficient to discriminate between

high and low demand segments; Despite the ability to price discriminate,

the firm still prefers to serve high demand consumers only. The model

suggests that it might be possible to discriminate between consumers by

other means than price-cost distortions; Low demand consumers face a two

part tariff with a per unit price possibly above marginal cost, together with

a restriction on usage, whereas high demand consumers face an efficient two part tariff.
Description
Updated August 2004
Publisher
Norwegian School of Economics and Business Administration. Department of Economics
Series
Discussion paper
2001:19

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