Question

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What is a two-part tariff? Why do firms sometimes use them? What is an example of a firm that uses a two-part tariff as part of its pricing strategy?

Answer 1

A two-part tariff refers to a pricing practice when a producer maximizes its profits by charging consumers an initial fee for the right to purchase a product or service, and also would ask to pay a usage fee for each unit. A firm will use it to capture additional consumer surplus than it otherwise would in a non-discriminating environment of pricing. For example: credit cards firms who charge an annual fee and a per-transaction fee; landline telephones companies that charge fixed rental plus charging per minute for the cost of placing call on the network