A note on the economics of pass-through with two-part tariff pricing

Abstract

When a firm sells a product together with another product, it may rely on a twopart tariff. I explain that when a firm uses a two-part tariff, a cost increase may or may not be passed through to final consumers. Depending on the characteristics of final consumers' demand, a cost increase could result in no increase in the price of either product, an increase in the price of both products, or an increase in the price of one product and a decrease in the price of the other product.