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Competition for exclusive customers: comparing equilibrium and welfare under one-part and two-part pricing

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Abstract. 

This paper compares one-part and two-part pricing in a discrete-continuous choice model, providing more extensive welfare results than prior literature. Under two-part pricing, firms may set fixed fees with or without ‘unit-price commitment,’ where the lack of unit-price commitment is consistent with ‘after-market monopolization.’ We find that two-part pricing with unit-price commitment is firms’ dominant unilateral and joint pricing policy. Two-part pricing without unit-price commitment is the least desirable policy from a welfare standpoint. Under appropriate conditions, one-part pricing produces the highest consumer and social welfare, but the lowest profits.
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Keywords: D43; D61; K21; L13; L41; M31

Document Type: Research Article

Affiliations: 1: The Brattle Group 2: Department of Economics, University of California, Berkeley

Publication date: 2008-08-01

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