Optimal Two-part Pricing under Cost Uncertainty
Version of Record online: 18 OCT 2011
Copyright © 2011 John Wiley & Sons, Ltd.
Managerial and Decision Economics
Volume 33, Issue 1, pages 39–46, January 2012
How to Cite
Wong, K. P. (2012), Optimal Two-part Pricing under Cost Uncertainty. Manage. Decis. Econ., 33: 39–46. doi: 10.1002/mde.1559
- Issue online: 6 DEC 2011
- Version of Record online: 18 OCT 2011
- Cost uncertainty;
- Heterogeneous consumers;
- Risk aversion;
- Two-part pricing
This paper examines the optimal two-part pricing under cost uncertainty. We consider a risk-averse monopolistic firm that is subject to a cost shock to its constant marginal cost of production. The firm uses two-part pricing to sell its output to a continuum of heterogeneous consumers. We show that the global and marginal effects of risk aversion on the firm's optimal two-part pricing are to raise the unit price and lower the fixed payment. We further show that an increase in the fixed cost of production induces the firm to raise (lower) the unit price and lower (raise) the fixed payment under decreasing (increasing) absolute risk aversion. The firm's optimal two-part pricing is unaffected by changes in the fixed cost under constant absolute risk aversion. Finally, we show that a mean-preserving spread increase in cost uncertainty induces the firm to raise the unit price and lower the fixed payment under either decreasing or constant absolute risk aversion. Copyright © 2011 John Wiley & Sons, Ltd.