DP9106 On two-part tariff competition in a homogeneous product duopoly

Author(s): Krina Griva , Nikolaos Vettas

Publication Date: August 2012

Keyword(s): Market segmentation , Non-linear pricing , Two-part tariffs

JEL(s): D43 , L13

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP9106.asp.asp

We explore the nature of two-part tariff competition between duopolists providing a homogeneous service when consumers differ with respect to their usage rates. Competition in only one price component (the fixed fee or the rate) may allow both firms to enjoy positive profits if the other price component has been set at levels different enough for each firm. Endogenous market segmentation emerges, with the heavier users choosing the lower rate firm and the lighter users choosing the lower fee firm. We therefore characterize how fixing one price component indirectly introduces an element of product differentiation to an otherwise homogeneous product market. We also examine the crucial role that non-negativity constraints play for the nature of market equilibrium.