Question

Discuss briefly Two-part Tarrifs with examples

Answer 1

A two part tariff consists of a one time fee to gain the right to purchase the product and a per unit price afterwards. This kind of price discrimination is generally used by amusement parks. In order to find the optimal lump sum charge (one time fee), the monopolist captures the entire consumer surplus at perfect competition pricing and then charges the perfect competition price afterwards. This per unit price is equal to the firm's marginal cost. Some example of two part tariffs are:

a. Memberships offered in retail stores which charge a one time fee and then charge a discounted per unit price.

b. Amusement Parks charge an entry fee (right to enter the park) and then charge per ride.

c. Credit cards which charge annual fee and a transaction fee.

d. Bookstores charge a membership fee and charge a fixed price for every book purchased afterwards.