A method for the analysis of equilibrium multipart prices in oligopolistic markets

Motivated by the fact that both long distance and local telephone business are evolving into markets consisting of a few firms having different cost structures and offering multipart pricing schedules, and by the fact that there are almost no analyses of markets of this type in the economics literature, a methodology is developed for the analysis of multipart prices in these markets. The approach makes use of variational inequality theory to model static Nash equilibria in multipart prices, and a marketing type ‘product space’ model for differential products imbedded in a discrete choice model framework to model the demand. The approach is designed to be applicable to real world problems; it is flexible and constraints encountered in the real world can be imposed. Two specific models are developed for two-part tariffs, one without resale of services allowed and one allowing for resale. Some qualitative results concerning existence and uniqueness are presented, but the strength of the methodology is quantitative analysis. An algorithm for finding equilibria is presented. An example market representing business WATS is presented to demonstrate the method. The variety of scenarios that can be investigated using the methodology demonstrate its potential to be a very useful tool for the analysis of oligopolistic markets in which multipart prices are revalent.