2-Part Tariff Discrimination

Firms use the many price discrimination techniques one of them is called 2-part tariff which capture all or most of the consumer surplus, in a monopolistic market. Consumer surplus is the difference between the consumer willingness to pay for a good, compared to the total amount the consumer actually pay. Furthermore, firms have to adjust their 2-part tariff pricing according to the type of consumer demand present in the market.

A 2-part tariff is a second-degree price discrimination technique which consist of charging consumers with 2 fees, an entry fee for the right to purchase the product, a usage fee which is price per unit consumed by the consumer. An example of where this technique is used is amusement parks where there is an initial …show more content…
With 2 consumers in the market, the firm charges both consumers the same entry fee due to legal regulation. Then the firm have a choice to charge the consumers the entry fee equal CS1 or CS2, the firm would go ahead and charge the consumers the entry fee equal to CS1 the reason being because if they charge consumers the entry fee equal to CS1, both consumers would buy it. But, if they charge consumers the entry fee equal to CS2 then only consumer 2 would buy it and the firm would not maximise its profits. The firm have a choice of setting their entry fees high or a low, depending on which one gives them a greater …show more content…
However, the firm also, incur a small lose from both the consumers, which is shown by C1 and C2 in the graphs above, from consumer 1 the firm incur a loss of $50 (20- 10= 10, 70-60= 10, 10x10/2) and from consumer 2 also, a $50 loss (20-10= 10, 90-80=10, 10x10/2). The losses combine together make $100 which is still less than what the firm make in profits by rising