Consumer by setting a fixed fee, the first tariff

Consumer surplus is an economic portion of consumer benefit,
that is calculated by examining the variance between what Clients / consumers are
able and willing to pay for services or goods relation to its market price, or
what they essentially do spend on the services or goods. Consumer surplus happens
when a Client / consumers is eager to pay supplementary for a certain product
than the up-to-date market price.

A demand curve is a graphic illustration used to gage
consumer surplus. It shows the relationship between the quantity of the product
demanded at that price and the price of a product, with amount demanded drawn
on the x-axis and the price drawn on the y-axis of the Because of the law of falling
marginal utility, there is a downward sloping on the demand curve, the area
below the downward slope is where the consumer surplus is measured.

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Two-part tariff’ is a price discrimination method that involves
in charging clients with surplus sum payment for the right to buying the
product and then a price per unit consumed. Amusement parks and golf clubs are
places where this practice is used.

The purpose of a two-part tariff is to extract further consumer
surplus, by using a scheme pricing made up of two parts:

·        
A set, onetime fee charged to each consumer which
the entitles the person to make further purchases.

• A price per each unit bought.

A firm must set the entrance fee known also as an enrolment
fee and the price per-unit of the product which maximises its profit. The product
purchased to be maximised by consumers the firms must set a price that is equivalent
to the marginal cost.

Then, firms will appropriate consumer surplus doing this by
setting a fixed fee, the first tariff would be the enrolment fee, which lets
the monopoly to extract all consumer surplus. Also, the second tariff is the
price per unit, being this price equivalent to marginal cost, which then means
that there is no surplus, since the surplus cannot be extracted twice. Necessary
condition for utilizing a Two-Part Tariff  one The supplier must have market power. The
producer must be able to control access.

Two-part tariff example: You decide to open a bar. Any given
night you will have set cost of £1,000 plus a variable cost of £0.50 per drink
(the only things you sell in the bar are drinks).

TC = £1,000 + 0.5Q   MC = £0.50 (Q is quantity of drinks, costs in £)

To determine the optimal two-part tariff a single kind of
consumer If there is single type of consumer & all consumers have a similar
demand curve, then the consumer surplus can be captured setting the price equivalent
to marginal cost and setting the set fee also equivalent to the consumer
surplus for an individual consumer.

If there are two types of consumers and all of the consumers
within the same group have a similar demand curve, therefore the way to capture
all the available consumer surplus is by maximizing the profit function with the
respect to price. At the same time, we don’t know which of the following
solutions would reward us more profits: 1) only sell to the high yield
consumers set P =MC and then the fee equivalent to the surplus of the high
yield customers. 2) sell to both the types of consumers set the fee equivalent
to the surplus of the low yield customers and then choose P to max total profit
(together with the fees) which will result in P > MC.

Looking at the figure underneath that shows 2 different
demand curves for two different types of clients who have different willingness
to pay, there are different ways to implement a two-part tariff. Monopolies can
make consumers pay different entry fees for each consumer rendering to their
willingness to pay, extracting all the consumer surplus. When monopolies are incapable
to distinguish among different types of consumers, they can make consumers pay an
entry fee high enough so only the more limited, more willing to pay consumers
get the product (Green).

The monopoly extracts all the consumer surplus of the first
type of consumer, but will not sell to the second type. Lastly, the monopoly
can charge consumers the same entry fee to both types, but that entry fee will
be that of the fewer willing consumer, A2, charging consumers the same to the
other consumers, A1 (blue). That can be seen, in this occasion the monopoly
will be able to extract more consumer surplus by rising prices from p to p’: it
will then extract fewer from the 2nd  type of the consumer but will then extract
even more from the first type of consumer area +.

 

 

Quite markedly consumer demands may differ across
individuals, assumed this possibility the two-part tariffs strategy can be
concluded as follows if consumer or client demands are nearly identical a two-part
tariff scheme can increase profits by making consumers pay a price close to the
entry fee and the marginal cost. Also, if there’s a difference in consumer
demands a scheme (two part tariff) or a single price scheme can be utilized by charging
a price well above the marginal cost and a lower entry fee to attract all
consumers or to set a single price.