Optimal Two-Part Tariff of Telecommunications Service

Most of telecommunications systems are usually supplied under a two-part tariff system. Two-part tariff is the system which users must pay marginal charge according to their volume, in addition to a monthly fixed charge. As the telecommunications technology advances, in the so-called advanced information-oriented society, it is expected that the charge will not be imposed proportional to the distance between caller and recipient but to the volume transmitted.Most of telecommunications systems have demand (consumption) externalities in that the benefit of a subscriber depends on the number of subscribers of the system. As the number of subscribers increases, the benefit which a subscriber can obtain from the service also increases. They also obtain benefit from receiving calls without paying any charge. These characteristics are essential to analyzing the demand and supply of the telecommunications service. From this point of view, this paper is organized. Considering the demand, supply and tariff structure in equilibrium, we derive the optimal two-part tariff both for profit maximization and for total surplus maximization. The results are as follows. In the former case, the constant marginal charge per volume is set higher than the constant variable cost, while the fixed charge per subscriber diverges from the fixed cost according to the two opposing factors which result from the externality effects. In the latter case, the constant marginal charge is set lower than the variable cost by the benefit from receiving induced by the marginal increase in total demand. Also the fixed charge must be set lower than the fixed cost because of the external effects.