Chapter12

# Practical application two part tariff necessary

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Practical application Two part Tariff. Necessary conditions: Individual demand curves are all known No arbitrage opportunity. Method: Total amount (= tariff) the consumer pays for q units is T(q) = F + p*q F: fixed fee, p: per-unit charge Result: Charge consumer p=MC and F equal to the would-be consumer surplus when p=MC. Hence F is different for each consumer. Special case: if consumers are identical F is equal across consumers.

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Price Discrimination First Degree Price Discrimination 2 part tariff. Exercise: Consider the monopolist presented in the previous exercise with demand curve given by P=120 Q and the MC =2Q. If the monopolist is allowed and is able to first price discriminate, using the two part tariff method to identify his fixed fee and the per unit price and quantity associated with that price. What happen to the DWL?
Other pricing method: Sell in Bundle. Example: Sell Word and Excel separately or sell the bundle called Microsoft office. Two types of consumers, A and B. A’s valuations are 120 for Word and 80 for Excel. B’s valuations are opposite: 80 for Word and 120 for Excel. MC=0. Microsoft can sell all programs separately for 2*80+2*80=\$320 Microsoft can also sell two times MS Office Suite for 2*200=\$400
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