Does Competition Definitely Benefit Consumers? A Case of Two-Part Tariffs

Abstract

This note compares monopoly equilibrium outcomes with those of duopoly when firms price their products with two-part tariffs. Although a monopolistic firm never charges a lower marginal price than imperfectly competitive firms, it sets a lower entry fee under certain market conditions. In turn, monopoly is likely to result in greater aggregate consumer surplus, net of all purchasing costs, than duopoly. This implies that in the process of opening a monopolistic market to competition, the regulator must carefully examine the market conditions to ensure that deregulation can reduce deadweight loss and improve consumer surplus as well.

Keywords: Monopoly, Duopoly, Competition, Two-part Tariff, Consumer Surplus

JEL Classification: D42, D43, L12, L13