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Competition and Two-Part Tariffs

Beth Hayes
The Journal of Business
Vol. 60, No. 1 (Jan., 1987), pp. 41-54
Stable URL: http://www.jstor.org/stable/2352946
Page Count: 14
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Competition and Two-Part Tariffs
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Abstract

Traditional theories have viewed two-part tariffs as price-discrimination devices, employed exclusively by firms with market power. This paper offers an explanation for the use of such price schedules by firms in highly competitive markets, such as health clubs. It is argued that, in a world with buyer uncertainty about future demands, they can provide insurance for risk-averse buyers. The fixed entry fee finances a marginal price below marginal cost. It is shown that the benefits from this lower price will, under certain specified conditions, outweigh the costs of the entry fee.

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