Uniform Two-Part Tariffs and below Marginal Cost Prices: Disneyland Revisited

Steven Cassou () and John C Hause

Economic Inquiry, 1999, vol. 37, issue 1, 74-85

Abstract: This paper completely characterizes the demand and cost parameters that 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 the square root of 2, although for most parameters the profit increase is much smaller. Copyright 1999 by Oxford University Press.

Date: 1999
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