TWO-PART TARIFFS AND MULTISTAGE PROGRAMMING

Abstract

This article demonstrates the relationship between the utility function's parameters which represent consumer's taste and the reservation price. We describe the changes in the reservation price analytically and supplement the geometrical illustrations by economic interpretations. We formulate the monopolist’s problem of setting the price of a capital good and the price of a service that the capital good provides as the two stage programming problem and illustrate the influence of consumers’ preferences and their income on the service market client structure and monopolist’s decisions on couple of illustrative examples.

Keywords

• two-part tariff
• reservation price
• price of a capital good
• service price
• homogeneous and heterogeneous consumers
• two-stage programming