Can price discrimination lead to product differentiation? A vertical differentiation model

Fabian Herweg ()

Bonn Econ Discussion Papers from University of Bonn, Germany

Abstract: In this paper, I compare two-part tariff competition to linear pricing in a vertically differentiated duopoly. Consumers have identical tastes for quality but differ in their preferences for quantity. The main finding is that quality differentiation occurs in equilibrium if and only if two-part tariffs are permitted. Furthermore, two-part tariff competition encourages entry, which in turn increases welfare. Nevertheless, two-part tariff competition decreases consumers' surplus compared to linear pricing.

Keywords: Duopoly; Two-part tariff; Vertical differentiation (search for similar items in EconPapers)
JEL-codes: D43 L11 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
Date: 2007-03
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Persistent link: http://EconPapers.repec.org/RePEc:bon:bonedp:bgse2_2007

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