The Effect of Income on Optimal Two Part Tariffs

Abstract

Two-part tariffs are a common feature of utility pricing. In particular telecommunications firms apply the two-part tariff to pricing telephony for which there is a telephone network access price and a telephone call price. In this paper the influence of income on an optimal two-part tariff is analysed for a range of market scenarios that includes maximising profit and maximising economic efficiency. The cost of the telephony service also consists two-parts: a constant marginal cost per subscriber and a constant marginal cost percall. The telephony service is offered to a population of individuals who have the same preferences for all goods and services but different incomes. The main finding is that if there is a positive income effect then the optimal two-part tariff call price is greater than the marginal cost of calling. Furthermore the contribution to the firm as a result of the call price being greater than its marginal cost is transferred to the optimal access fee. This result holds for the range of market scenarios considered in this paper.