Monopolistic Competition with Two-Part Tariffs

Abstract

Non-uniform pricing equilibria are shown to dominate uniform pricing equilibria in free entry, monopolistically competitive markets with identical consumers. The non-uniform pricing equilibrium is welfare optimal. Comparisons of Cournot and non-uniform pricing equilibria in terms of the equilibrium number of firms and sales per firm show that the positioning of Cournot equilibria relative to the welfare optimal configuration of firms and outputs depends on the relative curvatures of inverse demand and average cost functions, entry-induced rotation of inverse demand functions, and the relative price effects of changes in own and other firms outputs. The choice between the non-uniform and uniform pricing interpretations of equilibria in differentiated product markets may have important implications for policy analysis.