Two-part tariff: Difference between revisions

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{{More footnotes|date=February 2010}}

[[A]]<ref>{{Cite journal|last=Iverson|first=Cheryl|date=2009-04-01|title=Software Manual or Guide|journal=AMA Manual of Style|doi=10.1093/jama/9780195176339.022.97}}</ref> '''two-part tariff''' (TPT) is a form of [[price discrimination]] wherein the price of a [[product (business)|product]] or [[Service (economics)|service]] is composed of two parts -– a lump-sum fee as well as a per-unit charge.<ref>Palgrave Dictionary of Economics: http://www.dictionaryofeconomics.com/article?id=pde2011_T000188 {{Webarchive|url=https://web.archive.org/web/20171214014411/http://www.dictionaryofeconomics.com/article?id=pde2011_T000188 |date=2017-12-14 }}</ref><ref>Robert S. Pindyck and Daniel L. Rubinfeld: ''Microeconomics'', 8th edition, Pearson, 2013, p. 414.</ref> In general, such a pricing technique only occurs in partially or fully [[monopoly|monopolistic]] [[market (economics)|market]]s. It is designed to enable the firm to capture more [[consumer surplus]] than it otherwise would in a non-discriminating pricing environment. Two-part tariffs may also exist in [[Competition (economics)|competitive markets]] when consumers are uncertain about their ultimate demand. Health club consumers, for example, may be uncertain about their level of future commitment to an exercise regimen. Two-part tariffs are easy to implement when connection or entrance fees (first part) can be charged along with a price per unit consumed (second part).<ref>{{Cite book|last=Phillips|first=L|title=Palgrave Macmillan (eds) The New Palgrave Dictionary of Economics|publisher=Palgrave Macmillan|year=1987|isbn=978-1-349-95121-5|___location=London}}</ref>

Depending on the homogeneity of demand, the lump-sum fee charged varies, but the rational firm will set the per unit charge '''above or equal to''' the [[marginal cost]] of production, and '''below or equal to''' the price the firm would charge in a [[Monopoly#Monopolistic pricing|perfect monopoly]]. Under [[Competition (economics)|competition]] the per-unit price is set below marginal cost.<ref>Hayes, B. (1987), p. 42.</ref>

An important element to remember concerning two-part tariffs is that the product or service offered by the firm must be identical to all consumers, hence, price charged may vary, but ''not due to different costs borne by the firm'', as this would imply a [[Differentiation (marketing)|differentiated]] product. Thus, while credit cards which charge an annual fee plus a per-transaction fee is a good example of a two-part tariff, a fixed fee charged by a car rental company in addition to a per-kilometrekilometer fuel fee is not so good, because the fixed fee may reflect fixed costs such as registration and insurance which the firm must recoup in this manner. This can make the identification of two-part tariffs difficult.

==A two-part tariff when consumer demand is homogeneous==

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When consumers have homogeneous demand, any one consumer is representative of the market (the market being n identical consumers). For purposes of demonstration, consider just one consumer who interacts with one firm which experiences fixed costs and constant costs per unit - hence the horizontal [[marginal cost]] (MC) line.

Recall that the [[demand curve]] represents our consumer's maximum [[willingness to pay]] for any given output. Thus, as long as he receives an appropriate amount of goods, such as Qc, then he will be willing to pay his entire surplus (ABC) in addition to the cost per unit under [[perfect competition]] (Pc by Qc) - i.e. the entire area under the demand curve up to point Qc.

If the firm is perfectly competitive, it would charge price Pc and supply Qc to our consumer, making no [[economic profit#Economic definitions of profit|economic profit]] but producing an [[allocative efficiency|allocatively efficient]] output. If the firm is a ''non-price discriminating'' monopolist, it would charge price Pm per unit and supply Qm, maximizing profit but producing below the allocatively efficient level of output Qc. This situation yields economic profit for the firm equal to the green area B, consumer surplus equal to the light blue area A, and a [[deadweight loss]] equal to the purple area C.

If the firm is a ''price discriminating'' monopolist, then it has the capacity to extract more resources from the consumer. It charges a lump sum fee, as well as a per -unit cost. In order to sell the maximum number of units, the firm must charge the perfectly competitive price per unit, Pc, because this is the only price at which Qc units can be sold (note this is also the marginal cost per unit). To make up for the lower cost per unit, the firm then imposes a fee upon our consumer equal to herhis consumer surplus, ABC.

The lump-sum fee enables the firm to capture all the consumer surplus and deadweight loss areas, resulting in higher profit than a non-price discriminating monopolist could manage. The result is a firm which is in a sense allocatively efficient (price per unit is equal to marginal cost, but total price is not) - one of the redeeming qualities of price discrimination. If there are multiple consumers with homogeneous demand, then profit will equal n times the area ABC, where n is the number of consumers.

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* landline telephones where there is a fee to use the service ('line rental') and also a fee per call. The line rental covers the cost of providing the service, the per minute charge covers the cost of placing the call on the network.

* [[personal seat license]]s in professional sports, in which fans of a team pay an up-front lump sum fee for the right to purchase tickets at face value

* pay for play games

==Notes==

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==References==

*{{Cite journal |last=Hayes |first=Beth |author-link= |year=1987 |title=Competition and Two-Part Tariffs |periodical=Journal of Business |volume=60 |issue=1 |pages=41–54 |jstor=2352946 |issn= |doi=10.1086/296384 |publisher=University of Chicago Press }}

*{{cite book

| first = Don E.