Price discrimination and three part tariffs in a duopoly

Abstract

The paper studies how second degree price discrimination can be implemented in a duopoly with differentiated products. Two firms serve consumers having heterogeneous willingness to pay for the good, willingness to pay being private knowledge. Consumers choose from a menu of tariffs and are subsequently billed according to the chosen tariff. Although product differentiation enables the firms to implement price discrimination, it is shown that competition has important effects on the tariff structure. A fully separating equilibrium can only be reached if the firm is allowed to use three part tariffs, i.e., quantity discounts conditional on a certain minimum usage level, in addition to two part tariffs, i.e., quantity discounts on the condition that a fixed fee is paid in advance.