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A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly By Walter Y. Oi

A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly By Walter Y. Oi. Presented by Travieso Gonzalez. A two-part tariff is one in which the consumer pays a lump sum sum for the right to buy a product.

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A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly By Walter Y. Oi

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  1. A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse MonopolyBy Walter Y. Oi Presented by Travieso Gonzalez

  2. A two-part tariff is one in which the consumer pays a lump sum sum for the right to buy a product. • Examples Copying machines, Country club fees, SAM’s, and rate structures of some public utilities.

  3. A two-part tariff introduces a discontinuity in the consumer’s budget equation: XP+Y=M-T if X>0 Y=M if X=0

  4. Under two-part tariff, the consumer’s demand for rides depends on the price per ride P, income M, and the lump sum admission tax T • X=D(P, M-T)

  5. If there is only one consumer, or if all consumers have exactly the same utility functions and incomes, we can determine an optimal two-part tariff for the monopoly • Profits are given by • Where C(X) is the total cost function

  6. Differentiation with respect to T gives us: • Where c’ is the marginal cost of producing an additional ride.

  7. The max lump sum tax T* that can be charged is • And

  8. Differentiating profit with respect to P we get: • From before we get • Or

  9. The total profits can be given by, and reduced to only one parameter the price P • Where X is the market demand for rides T=T* is the smallest of the N consumer surpluses, and C(X) is the total cost function.

  10. Set dπ/dP equal to zero to obtain the optimum price

  11. A discriminatory two part tariff, in which price is equated to marginal cost and all consumer surpluses are appropriated by lump sum taxes, is best of all pricing strategies for profit-maximizing monopoly.

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