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The Effect of Income on Optimal Two Part Tariffs

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  • Srzich, Antony

Abstract

Two-part tariffs are a common feature of utility pricing. In particular telecommunications firms apply the two-part tariff to pricing telephony for which there is a telephone network access price and a telephone call price. In this paper the influence of income on an optimal two-part tariff is analysed for a range of market scenarios that includes maximising profit and maximising economic efficiency. The cost of the telephony service also consists two-parts: a constant marginal cost per subscriber and a constant marginal cost percall. The telephony service is offered to a population of individuals who have the same preferences for all goods and services but different incomes. The main finding is that if there is a positive income effect then the optimal two-part tariff call price is greater than the marginal cost of calling. Furthermore the contribution to the firm as a result of the call price being greater than its marginal cost is transferred to the optimal access fee. This result holds for the range of market scenarios considered in this paper.

Suggested Citation

  • Srzich, Antony, 2000. "The Effect of Income on Optimal Two Part Tariffs," Working Paper Series 19008, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    • Handle: RePEc:vuw:vuwcsr:19008
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    File URL: https://ir.wgtn.ac.nz/handle/123456789/19008
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    References listed on IDEAS

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    1. Brown,Stephen J. & Sibley,David Sumner, 1986. "The Theory of Public Utility Pricing," Cambridge Books, Cambridge University Press, number 9780521314008, January.
    2. Richard Schmalensee, 1981. "Monopolistic Two-Part Pricing Arrangements," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 445-466, Autumn.
    3. Walter Y. Oi, 1971. "A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 85(1), pages 77-96.
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