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