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Access pricing

Skander Essegaier, 2000
Faculty Advisor: John Z. Zhang


Access provision industries provide an interesting example of competitive markets where capacity mediate firms' choice of a pricing structure. Access providers generate their profits from the sale of access to a privately owned facility (amusement parks, fitness clubs, ski resorts), or to some proprietary content (Bloomberg, Reuters, Associated Press, America Online, Lexis Nexis).

This thesis develops models that capture some of the salient characteristics shared by access provision industries, and analyzes the optimal pricing structure when firms are allowed to use two-part tariffs. The thesis provides a theoretical investigation of the role of capacity on the pricing strategies of firms in markets for access services, where consumers have different usage rate.

In the first essay, capacity imposes a strict constraint on production. The usage rate is a characteristic of the individual consumer and varies across consumers. The second essay considers a more flexible approach of modeling a firm's capacity constraint, and introduces some price elasticity in consumer demand. What is meant by a firm capacity is really a scale of production that determines the firm's cost function. This analysis is extended in the third essay, where an initial capacity choice stage is added. In the first stage, firms simultaneously choose capacities; in the second stage, after observing both capacities, firms simultaneously choose prices. The impact of the flexibility of firm's capacity constraints on the long term pricing strategies in the industry is analyzed.

We show that a firm may choose a two-part tariff due to capacity constraints as the firm tries to optimize its customer mix of light and heavy users in order to engage its capacity efficiently. In the long term, however, firms can adjust their capacity levels. Nonetheless, we show that the pricing structure of firms in the industry depends on the degree of rigidity of the firms' capacity constraints. The pricing structure of firms in the industry varies from a flat fee to a two part-tariff pricing structure as firms' capacity constraints increase in rigidity.

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