Presented by Travieso Gonzalez A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly By Walter Y. Oi Presented by Travieso Gonzalez

A two-part tariff is one in which the consumer pays a lump sum sum for the right to buy a product. Examples Copying machines, Country club fees, SAM’s, and rate structures of some public utilities.

A two-part tariff introduces a discontinuity in the consumer’s budget equation: XP+Y=M-T if X>0 Y=M if X=0

Under two-part tariff, the consumer’s demand for rides depends on the price per ride P, income M, and the lump sum admission tax T X=D(P, M-T)

If there is only one consumer, or if all consumers have exactly the same utility functions and incomes, we can determine an optimal two-part tariff for the monopoly Profits are given by Where C(X) is the total cost function

Differentiation with respect to T gives us: Where c’ is the marginal cost of producing an additional ride.

The max lump sum tax T* that can be charged is And

Differentiating profit with respect to P we get: From before we get Or

The total profits can be given by, and reduced to only one parameter the price P Where X is the market demand for rides T=T* is the smallest of the N consumer surpluses, and C(X) is the total cost function.

Set dπ/dP equal to zero to obtain the optimum price

A discriminatory two part tariff, in which price is equated to marginal cost and all consumer surpluses are appropriated by lump sum taxes, is best of all pricing strategies for profit-maximizing monopoly.