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UNIFORM TWO‐PART TARIFFS AND BELOW MARGINAL COST PRICES: DISNEYLAND REVISITED
Author(s) -
Cassou Steven P.,
Hause John C.
Publication year - 1999
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1999.tb01417.x
Subject(s) - marginal cost , economics , marginal profit , tariff , microeconomics , profit (economics) , average cost pricing , marginal product , implicit cost , econometrics , rational pricing , total cost , production (economics) , capital asset pricing model , international trade
This paper completely characterizes the demand and cost parameters which induce a constant cost monopolist charging a uniform two‐part tariff to choose a marginal price less than marginal cost when selling to two types of consumers with different linear demands. It also provides a quantitative assessment of the potential significance of such pricing. Pricing below marginal cost maximizes profits in large regions of the model parameter space, contrary to widely held beliefs. If fixed costs are zero, pricing below marginal cost can increase profits by a factor of √2, although for most parameters the profit increase is much smaller. ( JEL D42, L11)