Concept

Two-part tariff

Summary
A two-part tariff (TPT) is a form of price discrimination wherein the price of a product or service is composed of two parts – a lump-sum fee as well as a per-unit charge. In general, such a pricing technique only occurs in partially or fully monopolistic markets. It is designed to enable the firm to capture more consumer surplus than it otherwise would in a non-discriminating pricing environment. Two-part tariffs may also exist in competitive markets when consumers are uncertain about their ultimate demand. Health club consumers, for example, may be uncertain about their level of future commitment to an exercise regimen. Two-part tariffs are easy to implement when connection or entrance fees (first part) can be charged along with a price per unit consumed (second part). Depending on the homogeneity of demand, the lump-sum fee charged varies, but the rational firm will set the per unit charge above or equal to the marginal cost of production, and below or equal to the price the f
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