Question

Explain how block pricing and two-part tariffs can sometimes be used to increase profits when facing homogenous consumers.

Answer 1

A firm uses block pricing when it charges relatively high price until the consumer reaches some threshold, then a lower price for units after the threshold.

There could be multiple threshold, example- buy one get one is example of block pricing .

Block pricing works well when firm faces homogeneous demand for its products ( when all consumers have similar demand for the product)

When the firm moves to block pricing , the lowest demand consumer is also affected , and this all results in increased profits of the firm dealing with homogeneous consumers.

Two part tariffs refers to a pricing technique where a business first charges an upfront fee from consumers fornuts product and later charges them additional fees based on their per unit usage.

Two part tariffs system is considered to be in form of price discrimination that is often employed by profit seeking business trying to maximise their total revenue by the means of fully capturing any consumer surplus that may be available.

If consumer demands are nearly identical, a two part pricing scheme can increase profits by charging a price close to marginal cost and an entry fee.