Equilibrium two‐part cost structures

We consider an oligopolistic product market in which two competing firms instead of paying a competitive input price choose a two‐part tariff. Costs for the input are divided up into upfront fixed costs independent of the output level and reductions in marginal costs. We explore under which competitive settings will such a two‐part cost structure correspond to equilibrium behavior in a two stage game. We find that firms in a static model do have an incentive to choose a two‐part cost structure when competition in the product market is not too strong and oligopoly rents can be shifted form the rival to the own firm. In a dynamic market when firms use Markov strategies competition is so intense that there are no rents to be shifted and firms do not benefit from two‐part cost structures.