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Optimal tariffs with uncertainty and downstream fixed costs

Author

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  • Constantatos, Christos
  • Pinopoulos, Ioannis N.

Abstract

We consider an upstream firm dealing with a downstream firm either via a two-part tariff or a linear tariff. The downstream firm faces demand uncertainty, it is risk-averse, and it must incur a fixed cost before demand realization. We show that when the fixed cost is relatively high, it is optimal for the supplier to subsidize part of it: such subsidization corresponds to a two-part tariff with negative fixed fee. In such case, the two-part tariff creates a stronger double-margin distortion than the linear tariff (no-subsidization scheme), and thus generates lower consumer surplus and total welfare.

Suggested Citation

  • Constantatos, Christos & Pinopoulos, Ioannis N., 2023. "Optimal tariffs with uncertainty and downstream fixed costs," Economics Letters, Elsevier, vol. 230(C).
    • Handle: RePEc:eee:ecolet:v:230:y:2023:i:c:s0165176523002859
    DOI: 10.1016/j.econlet.2023.111260
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    References listed on IDEAS

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    More about this item

    Keywords

    Uncertainty; Bilateral monopoly; Vertical tariffs; Fixed costs;
    All these keywords.

    JEL classification:

    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L17 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Open Source Products and Markets

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