Relaxing competition through quality differentiation and price discrimination

Fabian Herweg ()

Munich Reprints in Economics from University of Munich, Department of Economics

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 feasible. Furthermore, two-part tariff competition encourages entry, which in turn increases welfare. Nevertheless, two-part tariff competition decreases consumer surplus compared to linear pricing.

Date: 2012
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Published in Journal of Economics / Zeitschrift für Nationalökonomie 1 106(2012): pp. 1-26

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