Two-Tier Pricing of Shared Facilities in a Free-Entry Equilibrium

Suzanne Scotchmer

RAND Journal of Economics, 1985, vol. 16, issue 4, 456-472

Abstract: We explore how well the market will provide shared facilities which are subject to congestion. It is usually efficient to have multiple facilities because it is more efficient to spend resources on facilities than to endure crowding costs. We assume firms can charge a membership price and a visit price. We present a symmetric Nash equilibrium in these two prices. We show that if a number of firms is large, the membership price will be small. Thus, the membership price is a measure of market power. When entry occurs in response to positive profit (but such that entry is deterred by the prospect of negative profit in a symmetric Nash equilibrium), the endogenous number of firms is bounded below by one fewer than the efficient number. The fees paid by a client converge to an appropriately defined competitive price as the economy is replicated.

Date: 1985
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