Two-Part Tariff
What is Two-Part Tariff?
A two-part tariff is a pricing scheme with a fixed entry/access fee plus a separate per-unit price, used to capture consumer surplus beyond a single uniform price.
A firm with market power charges a lump-sum fee for the right to buy (the membership or access charge) and then a per-unit price for each item consumed. With identical consumers, the firm can set the per-unit price equal to marginal cost (the efficient quantity) and set the access fee equal to the consumer surplus, extracting nearly all the surplus while still producing the efficient output. Real examples include amusement parks (entry + per-ride), warehouse clubs (membership + prices), and phone plans (line fee + usage).
Two-Part Tariff: a worked example
Cedar Grove Park faces identical visitors whose ride demand is P = 10 - 0.5Q, and each ride costs the park $2 to run. Setting the per-ride price at marginal cost, $2, gives Q = 16 rides. Consumer surplus is the triangle 0.5 x 16 x ($10 - $2) = $64, so the park charges a $64 gate fee. Each visitor pays $64 + 16 x $2 = $96, of which $32 covers ride costs, leaving $64 of profit per visitor. Compare a single uniform price: MR = 10 - Q equals MC at Q = 8, price $6, profit (6 - 2) x 8 = $32. The two-part tariff doubles it.
The mistake students make with two-part tariff
The tempting error is setting the per-unit price at the monopoly level and then bolting a fee on top, on the logic that a firm with market power always prices above marginal cost. That shrinks the pie before you slice it: pricing above MC cuts quantity and destroys surplus the fee could otherwise have collected. With identical buyers the profit-maximizing per-unit price is marginal cost, because the access fee, not the markup, is where the profit comes from.
Two-Part Tariff questions
Why does a two-part tariff charge marginal cost per unit?
A two-part tariff sets the per-unit price at marginal cost because that maximizes the total consumer surplus available for the fixed fee to capture. Any markup above marginal cost cuts quantity and burns surplus that neither side then gets. The firm gives up per-unit margin and takes the whole triangle back through the access charge, which is why it can produce the efficient quantity and still extract almost all the surplus.
How is a two-part tariff different from first-degree price discrimination?
A two-part tariff reaches the same outcome as first-degree price discrimination when buyers are identical, but it does not require knowing any individual buyer's willingness to pay. The seller posts one fee and one per-unit price for everyone. Once buyers differ the two schemes part ways: a single fee set at the strongest buyer's surplus drives weaker buyers out, so the firm must lower the fee and surrender some surplus.
What happens to a two-part tariff when customers have different demands?
A two-part tariff loses efficiency when customers differ, because one access fee has to serve everyone. Set the fee at the heavy user's surplus and light users refuse to enter; set it at the light user's surplus and the firm collects too little from heavy users. Firms respond with menus of plans, a high fee with a low per-unit price against a low fee with a high per-unit price, and let buyers self-select.
Formula / Example
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