Economics
Two-part Tariff
A two-part tariff is a pricing strategy where consumers pay a fixed fee to access a service or product, in addition to a variable fee based on usage. This approach allows firms to capture consumer surplus and maximize profits by charging a fee for access and then a per-unit charge for usage. It is commonly used in industries such as telecommunications and utilities.
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eBook - PDFModern Economic Regulation
An Introduction to Theory and Practice
- Christopher Decker(Author)
- 2014(Publication Date)
- Cambridge University Press(Publisher)
30 In circumstances where consumers are heterogeneous in their preferences for the ser-vice, a non-linear tariff design – which allows consumers to choose from a menu of Two-part Tariffs – can potentially address this problem. For example, consumers might be offered two types of Two-part Tariffs, one with a low access charge but relatively higher per-unit charge to attract low-usage consumers, and another tariff with a higher access charge but relatively lower per-unit charge which should appeal to high-usage consum-ers. This approach can be more efficient than offering only a single uniform two-part 28 Berg and Tschirhart ( 1988 :106) observe that it suggests: ‘we can have our cake and eat it too’. 29 The possibility of this occurring is likely to vary across the different utility sectors. For example, Berg and Tschirhart ( 1988 :115) suggest that the access fee is unlikely to be viewed as too high by most consumers of electricity, whereas consumers of telephone services may be sensitive to the access price. Brown and Sibley ( 1986 :97) reach a similar conclusion. 30 See Berg and Tschirhart ( 1988 :151). However, as Willig ( 1978 :56) showed, by making the Two-part Tariff optional, it is possible that all consumers and producers are better off. 4.2 Pricing principles under full information 77 tariff, as it allows for the inclusion in the market of low-usage consumers through a lower access charge. This is illustrated in Figure 4.6 , where the firm offers two types of Two-part Tariffs; the first Two-part Tariff is tailored to low-usage consumers and has a low access charge (A 1 ) but a higher per-unit usage charge (p 1 ), while a second Two-part Tariff is tailored to high-usage consumers and has a relatively high access charge (A 2 ) and a lower per-unit charge (p 2 ). It follows that customers who intend to consume an amount less than Q* would have a lower total expenditure if they choose the first Two-part Tariff (low access charge, high per-unit usage charge).
eBook - PDFPrices and Quantities
Fundamentals of Microeconomics
- Rakesh V. Vohra(Author)
- 2020(Publication Date)
- Cambridge University Press(Publisher)
At this price she would maximize her surplus by acquiring two units. This will leave her with a surplus of $2. Since the fixed fee of $1.99 is less than that, by accepting this offer her sur- plus will exceed zero. Thus, given a choice between buying and not, she will buy. Profit will now be 1.99 + 8 = 9.99. Such a pricing scheme is called a Two-part Tariff. It is composed of a fixed fee F and a per-unit price p. If you purchase q units, the total payment will be F + pq. We have seen such a scheme before in Section 2.4. A Two-part Tariff is an example of bundling. The buyer is offered one unit for F + p, a bundle of two units for F + 2p, and so on. The Two-part Tariff recognizes that Mariko does not value all units the same. To extract as much surplus from her as possible, we should sell her the first unit for $7, the second unit for $5, and so on. The Two-part Tariff attempts to do just this. Here is why. If the fixed cost is F and the per-unit price is p, consumer A will spend F + p × Q to purchase Q units. The average price per unit she pays will be F Q + p. Notice that this quantity declines as Q, the amount she purchases, increases. Thus the average price per unit decreases with the volume of purchase. Can one do better than the Two-part Tariff just identified? Yes. Here is a Two-part Tariff that does better: F = 12 and p = 1. The surplus for various purchase quantities under this tariff is shown in Table 3.9. 66 3 Price Discrimination Table 3.9 Quantity and surplus Quantity 1 2 3 4 Mariko’s surplus < 0 < 0 0 0 Breaking ties in favor of the larger quantity, we see that Mariko will buy four units, yielding a profit of $12. Such tariffs are ubiquitous. Sometimes the fixed fee F is associated with an entry fee or cover charge. Some night clubs charge a fee to enter and then more depend- ing on the number of drinks ordered. Water and electricity bills are sometimes of this form.
eBook - PDF- Sonia Ferdous Hoque(Author)
- 2014(Publication Date)
- IWA Publishing(Publisher)
Yet incomes vary substantially, particularly in developing cities. 3.2 ANALYSIS OF WATER AND WASTEWATER TARIFFS Different forms of water tariffs can be effective in achieving different policy goals (see Section 3.3) and it is necessary to align the tariff components and rates with the local challenges faced by the water purveyors. This section discusses the advantages and disadvantages of the various water tariff components in relation to Role of prices 47 their general efficacy in addressing policy outcomes, along with examples of cities where each of the tariff components are being implemented. 3.2.1 Two part tariff: fixed + volumetric charges This is one of the most common forms of pricing water, where a basic service charge is applied along with a volumetric charge. This variable charge can be an increasing block rate, a uniform rate or a decreasing block rate. The rationale behind the basic charge is that all connections impart a cost on the utility, due to installation of permanent infrastructure, such as pipes or meters, and related administrative costs. Fixed charges can account for these costs even when there is no consumption and reduce revenue volatility for utilities, while the volumetric charge gives the consumer some degree of flexibility in controlling their water bills based on their consumption. However, if fixed charges constitute a large proportion of the water bill, consumers have limited ability to control their bills and hence, have less incentive for conservation. Hence, the balance between the proportion of fixed and variable charges should be carefully determined based on the local priorities. Some utilities do not have a separate fixed and variable charge as such, but they have a minimum charge that consumers need to pay for a certain quota of water consumed. Any consumption beyond the minimum quota is charged using volumetric rates. For example, in Kathmandu, domestic connections with a meter size of ½ pay a minimum charge of NRs.
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