Journal of Economics

, Volume 106, Issue 1, pp 1–26 | Cite as

Relaxing competition through quality differentiation and price discrimination

  • Fabian HerwegEmail author


In this paper, I compare two-part tariff competition to linear pricing in a vertically differentiated duopoly. Consumers have identical tastes for quality but differ in their preferences for quantity. The main finding is that quality differentiation occurs in equilibrium if and only if two-part tariffs are feasible. Furthermore, two-part tariff competition encourages entry, which in turn increases welfare. Nevertheless, two-part tariff competition decreases consumer surplus compared to linear pricing.


Duopoly Linear pricing Two-part tariff Vertical differentiation 

JEL Classification

D43 L11 L13 


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Copyright information

© Springer-Verlag 2011

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of MunichMunichGermany

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