Relaxing competition through quality differentiation and price discrimination |
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| Authors: | Fabian Herweg |
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| Institution: | (1) School of Business and Economics, Wilfrid Laurier University, Waterloo, Ontario, Canada;(2) Sauder School of Business, University of British Columbia, Vancouver, British Columbia, Canada;(3) Eller College of Management, University of Arizona, Tucson, AZ, USA |
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| Abstract: | In this paper, I compare two-part tariff competition to linear pricing in a vertically differentiated duopoly. Consumers have
identical tastes for quality but differ in their preferences for quantity. The main finding is that quality differentiation
occurs in equilibrium if and only if two-part tariffs are feasible. Furthermore, two-part tariff competition encourages entry,
which in turn increases welfare. Nevertheless, two-part tariff competition decreases consumer surplus compared to linear pricing. |
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