Competition for Exclusive Customers : Comparing Equilibrium and Welfare Under One-Part and Two-Part Pricing

This paper compares one-part pricing and two types of two-part pricing in a general discrete-continuous choice model, providing more extensive welfare results than prior literature. Under two-part pricing, firms may set fixed fees with or without unit-price commitment. When unit-price commitment is present, both fixed fees and unit prices are set before consumers choose their exclusive suppliers. In the absence of unit-price commitment, consumers choose exclusive suppliers based on known fixed fees and anticipated future unit prices, resulting in high unit prices consistent with models of aftermarket monopolization. Of the three possible pricing policies, we find that two-part pricing with unit-price commitment is firms' dominant unilateral pricing policy, and it also yields the highest joint profits (under appropriate demand assumptions). In terms of both consumer and social welfare, two-part pricing without unit-price commitment is dominated by the other pricing policies. With sufficiently elastic usage demand and sufficiently small customer-specific fixed costs, one-part pricing produces the highest consumer and social welfare, but the lowest firm profits, of the three pricing policies