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Strategic Effects Of Three-Part Tariffs Under Oligopoly, Yong Chao

Yong Chao

The distinct element of a three-part tariff, compared with linear pricing or a two-part tariff, is its quantity target within which the marginal price is zero. This quantity target instrument enriches the firm's strategy set in dictating the competition to a specific level, even in the absence of usual price discrimination motive. With general differentiated linear demand system, the competitive effect of a three-part tariff in contrast to linear pricing depends on the degree of substitutability between products: competition is intensified when two products are more differentiated, yet softened when two products are more substitutable.