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  • 2021
  • Working Paper
  • HBS Working Paper Series

Competitive Two-Part Tariffs

By: Jorge Tamayo and Guofu Tan
  • Format:Print
  • | Language:English
  • | Pages:47
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Abstract

We study competitive two-part tariffs in a model of asymmetric duopoly firms that offer (vertically and horizontally) differentiated products. We show that the sign of the markup for each product depends on the average expected demand among all customers as well as the marginal rate of substitution of the demand for access between the marginal price and fixed fee. We also provide necessary and sufficient conditions for marginal-cost pricing to be an equilibrium. Under the logit demand system with an outside option, we show that competitive two-part tariffs, even in the symmetric setting, are not efficient. When firms are asymmetric, our results indicate that the equilibrium strategy in two-part tariffs involves “cross-subsidization” between the marginal price and fixed fee for the less efficient firm, with the efficient firm offering a marginal price above its marginal cost.

Keywords

Product Differentiation; Two-part Tariffs; Marginal-cost Pricing; Cross-subsidization; Competition; Price

Citation

Tamayo, Jorge, and Guofu Tan. "Competitive Two-Part Tariffs." Harvard Business School Working Paper, No. 21-089, March 2021.
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About The Author

Jorge Tamayo

Strategy
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More from the Authors
  • Diagnosing Quality: Learning, Amenities, and the Demand for Health Care By: Jorge Tamayo, Achyuta Adhvaryu, Emilio Gutierrez and Anant Nyshadham
  • Absenteeism, Productivity, and Relational Contracts Inside the Firm By: Jorge Tamayo, Achyuta Adhvaryu, Jean-Francois Gauthier and Anant Nyshadham
  • Exclusive Dealing and Entry by Competing Two-Sided Platforms By: Cristian Chica, Kenneth Chuk and Jorge Tamayo
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