Optimal tariffs with uncertainty and downstream fixed costs

Christos Constantatos and Ioannis Pinopoulos

Economics Letters, 2023, vol. 230, issue C

Abstract: We consider an upstream firm dealing with a downstream firm either via a two-part tariff or a linear tariff. The downstream firm faces demand uncertainty, it is risk-averse, and it must incur a fixed cost before demand realization. We show that when the fixed cost is relatively high, it is optimal for the supplier to subsidize part of it: such subsidization corresponds to a two-part tariff with negative fixed fee. In such case, the two-part tariff creates a stronger double-margin distortion than the linear tariff (no-subsidization scheme), and thus generates lower consumer surplus and total welfare.

Keywords: Uncertainty; Bilateral monopoly; Vertical tariffs; Fixed costs (search for similar items in EconPapers)
JEL-codes: L17 L42 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:230:y:2023:i:c:s0165176523002859

DOI: 10.1016/j.econlet.2023.111260

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