Shopping on line can be easy, simple and save you lots of money. It can also take a lot of your time, frustrate you, and result in unwanted purchases. Now the same can be said for regular high street shopping, but with the vast opportunity presented by the Internet it will pay you to spend a few minutes reading this and understanding how to better optimize your Two Part Tariff shopping experience:
1. Compare - without doubt the biggest advantage that the Two Part Tariff offers shoppers today is the ability to compare thousands of Two Part Tariff at a time. This is a great thing, but not necessarily all the time! Too much can be daunting at times so take advantage of the great comparison sites and where possible let them do the hard work for you.
2. Research - if it has been said it will be on the internet. Ignorance is no longer a justifiable reason for buying the wrong thing. Take the time to research in detail everything that you could possible want to know about
3. Testimonials - don't know anybody that has bought a Two Part Tariff? Wrong! If the Two Part Tariff is good the internet will let you know. Use the Internet as a friend and get testimonials before you buy.
4. Questions - Got a question about Two Part Tariff then search the Forums, FAQ's, Blogs etc. Don't be afraid to ask .....
5. Reputation - Never heard of the company selling Two Part Tariff? Don't worry, no reason why you should know every company in the world, but you know someone that does! Use the internet to find out what people are saying about Two Part Tariff and build up a picture of their reputation for sales, returns, customer service, delivery etc.
6. Returns - still worried that even after all of the above your Two Part Tariff wont be what you want? Check out the returns policy. There is so much competition now that someone, somewhere is bound to offer the terms that you are comfortable with.
7. Feedback - happy with your Two Part Tariff then let people know, after all you are depending on others people input in your buying decision, so why not give a little back.
8. Security - check for the yellow padlock on the Two Part Tariff site before you buy, and the s after http:/ /i.e. https:// = a secure site
9. Contact - got a question about Two Part Tariff, or want to leave a comment then check out the sites contact page. Reputable companies have them and respond.
10. Payment - ready to pay for your Two Part Tariff, then use your credit card or PayPal! Be aware of companies that don't accept them, there may be genuine reasons but given the huge amount of choice you have when buying online there is no reason at all not to buy via credit card or PayPal.
A
two-part tariff is a
price discrimination technique in which the price of a
product (business) or
service is composed of two parts - a lump-sum fee as well as a per-unit charge. As with all price discrimination techniques, it may only occur in partially or fully
monopoly market (economics)s. It is designed to enable the firm to capture more
consumer surplus than it otherwise would in a non-discriminating pricing environment.
Depending on the homogeneity of demand, the lump-sum fee charged varies, but the rational firm will set the per unit charge
above or equal to the marginal cost of production, and
below or equal to the price the firm would charge in a
Monopoly#Monopolistic pricing.
An important element to remember concerning two-part tariffs is that it is still price discrimination, of which an important feature is that the product or service offered by the firm must be identical to all consumers, hence, price charged may vary, but
not due to different costs borne by the firm, as this would infer a
Differentiation (marketing) product. Thus, while credit cards which charge an annual fee plus a per-transaction fee is a good example of a two-part tariff, a fixed fee charged by a car rental company in addition to a per-kilometre fuel fee is not so good, because the fixed fee may reflect fixed costs such as registration and insurance which the firm must recoup in this manner. This can make the identification of two-part tariffs difficult.
A two-part tariff when consumer demand is homogeneous
image:TwoPartTariffHomogDemandNAX.svgWhen consumers have homogeneous demand, then any one consumer is representative of the market (the market being n identical consumers). For purposes of demonstration, consider just one consumer who interacts with one firm which experiences no fixed costs and constant costs per unit - hence the horizontal
marginal cost (MC) line.
Recall that the demand curve represents our consumer’s maximum willingness to pay for any given output. Thus, as long as he receives an appropriate amount of goods, such as Qc, then he will be willing to pay his entire surplus (ABC) in addition to the cost per unit under perfect competition (Pc by Qc) - i.e. the entire area under the demand curve up to point Qc.
If the firm is perfectly competitive, it would charge price Pc and supply Qc to our consumer, making no
economic profit#Economic definitions of profit but producing an allocative efficiency output. If the firm is a
non-price discriminating monopolist, it would charge price Pm per unit and supply Qm, maximizing profit but producing below the allocatively efficient level of output Qc. This situation yields economic profit for the firm equal to the green area B, consumer surplus equal to the light blue area A, and a deadweight loss equal to the purple area C.
If the firm is a
price discriminating monopolist, then it has the capacity to extract more resources from the consumer. It charges a lump sum fee, as well as a per unit cost. In order to sell the maximum number of units, the firm must charge the perfectly competitive price per unit, Pc, because this is the only price at which Qc units can be sold (note this is also the marginal cost per unit). To make up for the lower cost per unit, the firm then imposes a fee upon our consumer equal to her consumer surplus, ABC.
The lump-sum fee enables the firm to capture all the consumer surplus and deadweight loss areas, resulting in higher profit than a non-price discriminating monopolist could manage. The result is a firm which is in a sense allocatively efficient (price per unit is equal to marginal cost, but total price is not) - one of the redeeming qualities of price discrimination. If there are multiple consumers with homogeneous demand, then profit will equal n times the area ABC, where n is the number of consumers.
A two-part tariff when consumer demand is different
image:TwoPartTariffDiffDemandNAX.svg
We now consider the case where there are two consumers, X and Y. Consumer Y's demand is exactly twice consumer X's demand, and each of these consumers is represented by a separate demand curve, and their combined demand (Dmarket). The firm is the same as in the previous example. We assume that the firm
cannot separately identify each consumer - it cannot therefore price discriminate against each of them individually.
The firm would like to follow the same logic as before and charge a per-unit price of Pc while imposing a lump-sum fee equal to area ABCD - the largest consumer surplus of the two consumers. In so doing, however, the firm will be pricing consumer X out of the market, because the lump-sum fee far exceeds his own consumer surplus of area AC.
Nevertheless, this would still yield profit equal ABCD. A solution to pricing consumer X out of the market is to thus charge a lump-sum fee equal to area AC, and continue to charge Pc per unit. Profit in this instance equals twice the area AC (two consumers): since consumer Y's demand is twice consumer X's, then 2 x AC = ABCD. As it turns out, the producer is indifferent to either of these pricing possibilities.
However, it is possible for the firm to earn even greater profits. Assume it sets the unit price equal to Pm, and imposes a lump-sum fee equal to area A. Both consumers again remain in the market, except now the firm is making a profit on each unit sold - total market profit from the sale of Qm units at price Pm is equal to area CDE. Profit from the lump-sum fee is 2 x A = AB. Total profit is therefore area ABCDE.
Thus, by charging a higher per unit price and a lower lump-sum fee, the firm has generated area E more profit than if it had charged a lower per-unit price and a higher lump-sum fee. Note that the firm is no longer producing the allocatively efficient output, and there is a deadweight loss experienced by society equal to area F - this is a result of the exercise of monopoly power.
Consumer X is left with no consumer surplus, while Consumer Y is left with area B.
Examples of two-part tariffs
The following items could be identified as two part tariffs; but it is possible some of them could be debated on the basis of the presence of fixed costs such as insurance which the firm cannot recoup in any other way.
- "membership discount retailers" such as shopping clubs that charge an annual fee for admission to the point of sale and also charge for your purchases
- amusement parks where there are admission fees and also per-ride fees
- cover charge for bars combined with per drink fees
- credit cards which charge an annual fee plus a per-transaction fee
- loyalty cards or clubs
- landlline telephones where there is a fee to use the service ('line rental') and also a fee per call. The line rental covers the cost of providing the service, the per minute charge covers the cost of placing the call on the network.
References
| first = Don E.
| last = Waldman
| year = 2004
| title = Microeconomics
| chapter = 12.2 Two-Part Tariffs, Bundling and Tying
| pages = 332-335
| publisher = Pearson Addison Wesley
| id = ISBN 0-201-65877-1
-->
See also
A
two-part tariff is a price discrimination technique in which the price of a product (business) or service is composed of two parts - a lump-sum fee as well as a per-unit charge. As with all price discrimination techniques, it may only occur in partially or fully monopoly
market (economics)s. It is designed to enable the firm to capture more consumer surplus than it otherwise would in a non-discriminating pricing environment.
Depending on the homogeneity of demand, the lump-sum fee charged varies, but the rational firm will set the per unit charge
above or equal to the
marginal cost of production, and
below or equal to the price the firm would charge in a
Monopoly#Monopolistic pricing.
An important element to remember concerning two-part tariffs is that it is still price discrimination, of which an important feature is that the product or service offered by the firm must be identical to all consumers, hence, price charged may vary, but
not due to different costs borne by the firm, as this would infer a Differentiation (marketing) product. Thus, while credit cards which charge an annual fee plus a per-transaction fee is a good example of a two-part tariff, a fixed fee charged by a car rental company in addition to a per-kilometre fuel fee is not so good, because the fixed fee may reflect fixed costs such as registration and insurance which the firm must recoup in this manner. This can make the identification of two-part tariffs difficult.
A two-part tariff when consumer demand is homogeneous
image:TwoPartTariffHomogDemandNAX.svgWhen consumers have homogeneous demand, then any one consumer is representative of the market (the market being n identical consumers). For purposes of demonstration, consider just one consumer who interacts with one firm which experiences no fixed costs and constant costs per unit - hence the horizontal
marginal cost (MC) line.
Recall that the demand curve represents our consumer’s maximum willingness to pay for any given output. Thus, as long as he receives an appropriate amount of goods, such as Qc, then he will be willing to pay his entire surplus (ABC) in addition to the cost per unit under perfect competition (Pc by Qc) - i.e. the entire area under the demand curve up to point Qc.
If the firm is perfectly competitive, it would charge price Pc and supply Qc to our consumer, making no
economic profit#Economic definitions of profit but producing an
allocative efficiency output. If the firm is a
non-price discriminating monopolist, it would charge price Pm per unit and supply Qm, maximizing profit but producing below the allocatively efficient level of output Qc. This situation yields economic profit for the firm equal to the green area B, consumer surplus equal to the light blue area A, and a
deadweight loss equal to the purple area C.
If the firm is a
price discriminating monopolist, then it has the capacity to extract more resources from the consumer. It charges a lump sum fee, as well as a per unit cost. In order to sell the maximum number of units, the firm must charge the perfectly competitive price per unit, Pc, because this is the only price at which Qc units can be sold (note this is also the marginal cost per unit). To make up for the lower cost per unit, the firm then imposes a fee upon our consumer equal to her consumer surplus, ABC.
The lump-sum fee enables the firm to capture all the consumer surplus and deadweight loss areas, resulting in higher profit than a non-price discriminating monopolist could manage. The result is a firm which is in a sense allocatively efficient (price per unit is equal to marginal cost, but total price is not) - one of the redeeming qualities of price discrimination. If there are multiple consumers with homogeneous demand, then profit will equal n times the area ABC, where n is the number of consumers.
A two-part tariff when consumer demand is different
image:TwoPartTariffDiffDemandNAX.svgWe now consider the case where there are two consumers, X and Y. Consumer Y's demand is exactly twice consumer X's demand, and each of these consumers is represented by a separate demand curve, and their combined demand (Dmarket). The firm is the same as in the previous example. We assume that the firm
cannot separately identify each consumer - it cannot therefore price discriminate against each of them individually.
The firm would like to follow the same logic as before and charge a per-unit price of Pc while imposing a lump-sum fee equal to area ABCD - the largest consumer surplus of the two consumers. In so doing, however, the firm will be pricing consumer X out of the market, because the lump-sum fee far exceeds his own consumer surplus of area AC.
Nevertheless, this would still yield profit equal ABCD. A solution to pricing consumer X out of the market is to thus charge a lump-sum fee equal to area AC, and continue to charge Pc per unit. Profit in this instance equals twice the area AC (two consumers): since consumer Y's demand is twice consumer X's, then 2 x AC = ABCD. As it turns out, the producer is indifferent to either of these pricing possibilities.
However, it is possible for the firm to earn even greater profits. Assume it sets the unit price equal to Pm, and imposes a lump-sum fee equal to area A. Both consumers again remain in the market, except now the firm is making a profit on each unit sold - total market profit from the sale of Qm units at price Pm is equal to area CDE. Profit from the lump-sum fee is 2 x A = AB. Total profit is therefore area ABCDE.
Thus, by charging a higher per unit price and a lower lump-sum fee, the firm has generated area E more profit than if it had charged a lower per-unit price and a higher lump-sum fee. Note that the firm is no longer producing the allocatively efficient output, and there is a deadweight loss experienced by society equal to area F - this is a result of the exercise of monopoly power.
Consumer X is left with no consumer surplus, while Consumer Y is left with area B.
Examples of two-part tariffs
The following items could be identified as two part tariffs; but it is possible some of them could be debated on the basis of the presence of fixed costs such as insurance which the firm cannot recoup in any other way.
- "membership discount retailers" such as shopping clubs that charge an annual fee for admission to the point of sale and also charge for your purchases
- amusement parks where there are admission fees and also per-ride fees
- cover charge for bars combined with per drink fees
- credit cards which charge an annual fee plus a per-transaction fee
- loyalty cards or clubs
- landlline telephones where there is a fee to use the service ('line rental') and also a fee per call. The line rental covers the cost of providing the service, the per minute charge covers the cost of placing the call on the network.
References
| first = Don E.
| last = Waldman
| year = 2004
| title = Microeconomics
| chapter = 12.2 Two-Part Tariffs, Bundling and Tying
| pages = 332-335
| publisher = Pearson Addison Wesley
| id = ISBN 0-201-65877-1
-->
See also
Two-part tariff - Wikipedia, the free encyclopedia
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