Please interpute this ifor me Optimal Two-Part Tariffs Two-part tariffs entail c
ID: 1134793 • Letter: P
Question
Please interpute this ifor me
Optimal Two-Part Tariffs
Two-part tariffs entail charging both a lump-sum entry fee for access to the facility or service and a per-unit user fee for each unit sale consumed. Amusement parks, nightclubs, golf and tennis clubs, copier leasing companies, cellular phone providers, Internet access providers, and rental car companies often employ such pricing. Their revenue per unit sale is a nonlinear function of two parts: a lump-sum monthly or daily fee that provides access to the facility, phone, computer, or rental car independent of use, and a per-hour or per-minute or per-mile fee that varies with usage. The magnitude per unit of user fees should at least cover marginal costs so that heavy demanders “pay the freight” through higher total user fees. Tying the price for a leased copier to a meter that effectively measures intensity of use results in a differential monthly leasing fee across customer segments plus a cheap incremental cost per copy.
Explanation / Answer
This case explain two strategies adopted by different kinds of firms and organizations regarding pricing and revenue generation models.
1. Example of an amusement park: Suppose you want to go to an amusement park. At the entrance they charge $10 as an entry fees and there are 5 different rides/activities and each again is charged at $12. It means that there revenue depens on fixed entry fees+ number of rides/activities enjoyed by the user.
Hence, their revenue per unit sale is a nonlinear function of two parts(Fixed entry fees+ number of rides/activities). As it cannot be predicted how many rides/activities an user will enjoy, revenue cannot be assumed as $10+60=70 (60=$12 per ride/activity multiplied by 5 number of rides/activities)
Hence it cannot be linear and assumed as number of visitors multiplied by 70.
While deciding per ride/activity fees, marginal cost should be considered, if it is less than Marginal cost then it is not profitable to maintain the ride. Hence entry fees can be nominal but per ride fees can be higher. Company makes profit msjorly from per unit of ride/activity.
2. In the second case, front end fees example for ipod is charged very high and hence the user fees for itunes can be placed as low as it becomes a value added service and not mandatory for a customer. Here, the service provider makes sure that marginal cost is covered in the front end only and additional services are only there to increase revenue. Company has already made profit at the fron end while selling an ipod.