The two- part tariff pricing system is related to price discrimination and is an Interesting part of business strategy. Under a two-part tariff structure consumers must pay a fee up front for the right to buy the product and then they have to pay an additional fee for each unit of the product they wish to consume. (Pindyck and Rubinfield, 2001) Examples of industries, with this kind of pricing strategy is popularly adopted, is telecommunication industries, amusement parks and public water supply. At the time, there are several telecommunication companies in Australia, and they all have some kind of market power. That is because they are well known and well established on the market.
Pricing is a very important issue in the competition to gain consumers. This essay will look at the telecommunication industry in Australia and the way telecommunication companies often apply to the two- part tariff pricing structure. It will look at different benefits and costs with this kind of system compared to just a single price system. It will also consider how an introduction of increasing block tariff system for the variable part of the pricing system can improve sales revenue. At the end it will look at the Oligopolistic market structure, and how this market structure will affect the pricing policy of the telecommunication companies. Part A: The current two Part tariff structure of the telecommunication industry in Australia First a more detailed explanation of the two-part tariff structure is necessary.
As mentioned in the introduction two- part tariff means that the consumer pays both a entry fee for the right to buy the product, and a usage fee. The rule of thumb of pricing says that price and output should be chosen so marginal revenue should equal marginal cost. But in the two-part tariff system this would only be the case if there were only one consumer in the market. (Pindyck and Rubinfield, 2001) In a market for telecommunication there are many consumers with different demands.
To have a low entry fee means that more entrants will attend the market. If the entry fees are low and there are more entrants to the market, the profit derived from the entry will fall. The company has to choose an entry fee that will result in the optimum number of entrants. The optimum number of entrants is the number that allows for maximum profit. (Pindyck and Rubinfield, 2001) The Australian telecommunication companies today have different kinds of plans that The consumers can choose between. For example Telstra's different plans for home telephone lines include homeline plus, homeline budget, homeline complete and homeline net service.
Examples of types of calls include: Local calls, overseas calls, long distance calls and calls to mobile phones. Each plan have a fixed fee, that for example can be a monthly rental fee, and a variable part that for example can be call rates. The problem for a company that uses a two-part tariff system can often be how to set the fixed fee and how much they should charge the consumers for the calls. Should the fixed fee be high and the variable fee low, or should the fixed fee be low and the variable fee high. But as telecommunication companies have different kinds of plans, both options often are a part of their pricing strategy. The consumer has the ability to choose plan after how much, and what types of calls they make.
They have plans for people that call much; this kind of plan often has higher fixed fee, and cheaper calls. If the consumer calls less, they might choose a plan with a lower fixed fee, and more expensive calls. For a person that calls a lot to mobile phones, the best thing for them is to have lower rates to mobile phones, and people that have family and friends overseas might be interested in cheap overseas calls, and they will choose a plan that includes this. These days, telecommunication companies include more than just homeliness. Mobile phone plans, and Internet has been an important part of their industry.
Part B: Benefits and costs of the two-Part tariff system There are different benefits and costs with this kind of system compared to a fixed charge system. One benefit for the company with a system like this can for example be that with the entry fee, the consumer often makes a commitment to stay with the company for at least one year and in this way the company creates market power. But this is not the case for all the different companies. For example with Telstra, consumers can have the plan for just one month, and then cancel the line if they want to.
There are no obligations for the customers to stay with the company for a certain time. Other benefits are for example that more the customers calls, higher the fixed fee for the plan can be, and then they will earn more. There will be an increase in sales revenue with people calling more, and there that is the reason that the two-part tariff can be a benefit for the telecommunication company. A cost with this system is that because there is a variable part and not only a fixed charge, the company depends on that the consumers will call, to earn something from the variable part of the system. But in the telecommunication industry, consumers will always use the telephone, as it is an important part of people's daily lives. So there will be a bigger threat for them that the consumers may change to another company..