Question

You have been asked by your boss to report on the expected profits from a single price strategy compared with a two part pricing strategy. The estimated demand for the firm’s product is: Qd = 4000.2P.
Per unit cost is estimated as constant at $1,000.00. Provide a report which explains the profits from a single price profit maximizing strategy with a two part profit maximizing strategy involving a fixed fee plus a per unit fee. Assume that total fixed cost is $30,000. What is the optimal fixed fee? Why does the two part pricing policy increase total profits?

Answer 1

Answer on Question #41544, Economics, Microeconomics

Two-part pricing is one of many strategies used by firms that have market power. In a two-part pricing system firms charge a fixed fee for the right to use their goods and then charge a per unit fee for each unit purchased. The benefit of two part pricing for firms with market power is that it allows them to garner larger profits than they normally would at the monopoly price. Essentially firms are extracting more of the consumer surplus and turning it into direct profit. The ultimate two-part pricing scheme would charge a fixed fee equal to the total consumer surplus, thus extracting the most value out of the consumers. Source: Baye, Michael. *Managerial Economics and Business Strategy*. 2006. The chart below illustrates the two part pricing scheme:

Two Part Pricing When Consumer Demand is Homogenous