Two-part tariff competition in duopoly

Abstract – This paper develops two models of two-part tariff competition. When consumers are differentiated à la Hotelling, equilibrium prices equal marginal cost if and only if the demand of the marginal consumer equals the average demand. Entry fees are socially optimal in a symmetric equilibrium if all consumers participate in the market. Two-part tariffs tend to result in lower prices, higher profits and social welfare relative to uniform pricing. In the logit model, marginal cost pricing holds but entry fees are higher than socially optimal, and two-part tariffs lead to lower aggregate net consumer surplus but higher profits than uniform pricing.