On two-part tariff competition in a homogeneous product duopoly

•We explore two-part tariffs for homogeneous goods with heterogeneous consumers.•Competition in one price component allows firms to enjoy positive profits.•Fixing one price component indirectly introduces product differentiation elements.•Under non-negativity constraints we characterize equilibrium in a sequential game.•We highlight important similarities and differences from Shaked and Sutton (1982).

We explore aspects of two-part tariff competition between duopolists providing a homogeneous service when consumers differ with respect to their usage levels. Competition in only one price component (the fee or the rate) may allow both firms to enjoy positive profits if the other price component has been set at levels different enough between firms. Fixing one price component alters the nature of competition, indirectly introducing an element of product differentiation. Endogenous market segmentation emerges, with the heavier users choosing the lower rate firm and the lighter users choosing the lower fee firm. When no price component can be negative, competition becomes softer, profits tend to be higher but there is also a disadvantage for the firm that starts with a higher fee than that of its rival.