Wednesday 20 September 2023



There was a time not too long ago when people didn’t share as much as they do now with the rest of the world. Many of us went through our daily lives only staying in touch with people we truly valued and forgot about the ones that came through our lives and out as fast as revolving doors. Social media completely changed all that. All of a sudden, we were thrown back into reconnecting with people we hadn’t talked to in years and started inviting a whole new batch of people into our lives – aka our WhatsApp, Meta (Facebook) and Instagram friends besides X (Twitter) and LinkedIn followers, among a raft of other such sites.

The downside in posting on Social Media platforms has been well documented. People constantly check their phones for new messages or updates. Social media is addictive and can consume time that you may not have, forcing a tightening of schedule. There is the appalling lack of privacy on most sites as social media is public by nature. It is also victim to a ripple effect as a message is reposted in a background different from the original. Who is to stop access to content posted on social media without prior notice or permission from the user who originally posted it?

One school of thought says Social Media Etiquette involves understanding and following the unwritten rules and expectations of online communication to promote positive interactions and maintain a respectful and productive online environment. Adhering to social media etiquette helps create a positive and inclusive online environment, fostering healthy and respectful interactions between individuals and communities. It promotes effective communication, reduces misunderstandings, and encourages the development of meaningful connections and relationships.

On the other hand, there is the belief that Social Media makes us more self-centred, less empathetic and rude to others. It also makes us more narcissistic than ever because we can show off our achievements and post photos from parties without facing consequences.That said, there is no need to fan or ignite flames by providing material data that can cause otherwise rational people to butt in and sow discord. You can help yourself by following certain precepts.

Here are the four things you should never discuss when using social media.


It might be exciting and thrilling whenever you get into a new loving relationship, yet make sure to always keep the details of your love life personal. Sure, people don’t mind scrolling through your photo albums seeing pictures of you and your partner together, but the last thing they want to hear about is how much you love each other and can’t live without each other through status updates and tweets. Inevitably, there is a chance your relationship might not work out, and the last thing you want is to make a fool of yourself for being so outspoken about something that didn’t last.

Personal Struggles

Whenever you’re going through tough times, it might be tempting to tell your whole Social Media world about it, but here is a harsh truth: people don’t want to hear about your personal problems. These sites were intended to keep connected, not to dish out free group therapy sessions. Things like losing a job, going through a divorce, and filing for bankruptcy happen to a lot of people, but that doesn’t mean we should go around telling the world about our sorrows. Do your best to keep things like this off Social Media because eventually you’ll get through those tough times and wonder why they were such a big deal in the first place. You don’t want a reminder of your unhappy days to be documented for you and the whole world to see.

Political Beliefs

It astounds me how many individuals find it necessary to share their political beliefs with the rest of the world. As if it isn’t bad enough that the mainstream media can’t say enough about it, users of media sites have to chime in with their thoughts as well. Keep in mind, what you say about political candidates most likely isn’t going to change the way somebody feels about their established political beliefs, so keep it reeled in. It’s easy to get fired up about political candidates, especially when it’s this close to election time; however, by keeping your opinions to yourself, you’ll be able to stay out of some hectic social media rants.

Angry Rants

We all have bad days, but before the creation of Facebook and Twitter, those bad days were normally things we kept to ourselves. In the moment, our anger can seem completely justified, but just remember that things will eventually cool down. If you are enraged about something, try not to get on Social Media to tell the world about it. It may seem harmless at first, but the storm will eventually calm down and you might regret some things you say, especially if they are derogatory about a friend, your career, your love life, etc. Before there was ever Facebook or Twitter, we embraced the expected normalcies that came along with human interaction. Do yourself a huge favour and remember these four rules of social media etiquette whenever you next log on to your Social Media sites.


This is a guest post by Nadia Jones


Tuesday 19 September 2023



Electronic Business (e-Business) is, in its simplest form, the conduct of business on the internet. The first usage of the term was by IBM, in 1997, when it launched a commercial campaign on the internet, forcing many corporations to reconsider their perspective of their extant businesses with relation to the internet within its supposedly definable boundary of capabilities. This concept can be expanded by redifining it as the conduct of online business processes on the web, internet, extranet or a combination thereof. These customer and management-focussed business processes include buying and selling goods and services, servicing customers, processing payments, managing production and supply chains, collaborating with business partners, sharing information, running automated employee services and recruiting employees. With the evolution of the internet with time to a seemingly limitless entity, e-Business is the focussed harmonisation of Information and Communication Technologies (ICT) in furtherance of an overall business aim.

E-business is similar to e-commerce but encompasses much more than online purchasing transactions. Functions and services range from the development of intranets and extranets to the provision of e-services over the internet by application service providers. Enterprises conduct e-business to buy parts and supplies from other companies, collaborate on sales promotions and conduct joint research.

Corporations are continuously rethinking and reshaping their business models influenced by advanced technologies, hybrid workforces, heightened customer expectations and, specifically, the internet's availability, reach and ever-changing capabilities. The growth of e-business in recent decades has given rise to new business requirements. Consumers expect organizations to provide self-service options to conduct transactions, personalized experiences, and speedy, secure interactions. New regulatory laws and best practices for keeping electronic data secure have been established. Companies have adopted stringent security protocols and tools, including encryption, digital certificates and multi-factor authentication, to protect against hackers, fraud and theft.

Different Types of E-Business Models

1. Business-to-consumer (B2C) model. Sellers offer products and services directly to consumers online, and the buyer purchases them via the internet.
2. Business-to-business (B2B) model. Companies use the internet to conduct transactions with one another. Unlike B2C transactions, B2B transactions usually involve multiple online transactions at each step of the supply chain.
3. Consumer-to-business (C2B) model. Consumers create their own value and demand for goods and services. Examples include reverse online auctions and airline ticket websites such as Priceline and Expedia.
4. Consumer-to-consumer (C2C) model. Consumers are buyers and sellers via 3rd-party-facilitated online marketplaces such as eBay. These models generate revenue through personal ad fees, charges for memberships and subscriptions, and transaction fees.

Examples of e-Business

  • E-business encircles older companies that digitally transformed from legacy processes to data-centric operations and newer digitally oriented companies. The latter are organizations that advisory firm Gartner has defined as starting after 1995 with "operating models and capabilities [that] are based on exploiting internet-era information and digital technologies as a core competency." Since then examples of e-business organizations of different shapes and sizes have flooded the digital landscape.
  • Amazon, the world's largest online retailer and marketplace, has used its e-business model to disrupt and expand into numerous well-established industries, including publishing and supermarkets.
  • Uber and Ola, both of which built businesses that match drivers with people needing rides, disrupted the taxi and livery services industries. And in 2014, Uber went one step further in the USA and expanded its e-business with the launch of a food ordering and delivery platform, Uber Eats.
  • Travel sites like MakeMyTrip, Yatra and TripAdvisor enable consumers to research, plan and book all or pieces of their trips based on personalized criteria, such as price, consumer ratings and location.

Advantages of e-Business

E-Business has drastically changed how enterprises, government agencies, nonprofit organizations and other institutions operate, allowing them to increase productivity, lower costs, move more quickly toward digital transformation and upgrade processes.

Electronic invoicing, automated billing and digital payment systems lower the amount of time workers devote to these tasks, many of which were handled manually just a few decades ago. That kind of time savings allows businesses to decrease department head count or shift workers onto higher-value tasks. Digital systems also streamline workflows, reducing the time between invoicing and payment and improving cash flow for the business.

Electronic communication systems, such as email, video conferencing and online collaboration platforms increase productivity by decreasing delays between inquiries and responses -- whether the communication is among employees, employees and external business partners, or employees and customers. Decision-making is faster, resulting in more agile companies that are responsive to stakeholder needs and market demands. Electronic communication has also eliminated, in some cases, employee business travel and supported more open, collaborative cultures so any employee can contribute ideas.

Digital systems that power e-Business can also extend an organization's reach beyond its brick-and-mortar walls. Cloud-based business applications enable remote and hybrid workers to perform their jobs in the office, from their home and other locations. Similarly, cloud-based apps and the internet allow business transactions 24/7 so even solo practitioners and small businesses can conduct business globally.

Advanced technologies like big data, AI, machine learning, the cloud, automation and Internet of Things (IoT) have improved the ease, speed and effectiveness of numerous e-business tasks. These tasks include archiving information, deriving data insights, recording financial transactions and personalizing interactions with customers.

E-commerce software and services have delivered new capabilities to organizations like email marketing and created new avenues to sell their goods and services, such as online stores. It has enabled the creation of entirely new business models, such as eBay's capacity for B2C and C2C sales, social networking sites like Meta (Facebook), X (Twitter), Linked-In and Shopify, which offers the infrastructure and e-commerce platform for customers to create online stores and sell their own goods.

Zuboff (1988) argued that the computer, initially designed to replace lower echelon jobs by automating them had, instead, led to an unexpected outcome: a focus on what she called ‘informating’. A close look reveals that the technology implementation that Zuboff describes can be seen from two angles. One aspect concerns automation of arduous manual and repetitive tasks. The other facet, more central to Zuboff, involves informating or re-designing work well beyond automated tasks so that any new data generated by computerisation could be developed by workers into a strategic company asset. Informating calls for collecting, organising, analysing and creating a database, the domain of IT specialists, who then administer it. This information flow is, de facto, edifying to those with access to the computers, thereby precluding the planned laying off of staff. I agree with Zuboff, but find that I have to go beyond her. I believe that computerisation works at two levels:

The first and most important level is its output of information. It is this information that guides decision making authorities to an optimal business strategy, i.e. minimal cost and maximum efficiency. Information is of many types and impossibly diverse to pen. From an organisations’s point of view, the field could be narrowed, depending upon its raison d’ĂȘtre, to departmental productivity rates; cross-channel interaction, particularly in supply chains; delivery schedules/bottlenecks; market demand and performance, etc.

The second level is a mix of information and linked automation, fed downwards through a network, an indication that the management believes in informating.  Workers are granted access to role-specific data and overall section-wise performance, creativity is encouraged.  Workers now have the opportunity to explore different patterns in the information, perhaps bringing ideas to the company that will increase productivity, decrease operating costs, create new products, or serve customers better. Feedback is welcome. Workplace ethos also changes to an unshackled approach.

Next, consider the case of the world's second largest enterprise software company, Oracle. The first sentence that stares at you in big bold letters when you download their brochure at is their USP: INFORMATION GENERATES VALUE, the Cornerstone for Sustainable Compliance and Growth. Today’s branch heads in an organisation are constantly carrying out a balancing act. On the one hand, they must comply with increasingly stringent regulations, which require a consistent flow of information.  On the other, they must help guide the enterprise to a profitable future, investing in new opportunities and equipment while hedging risks to maximise Returns on Investment (ROI) and economies of scale. What is of great help here is that the information is fully transparent and the data presented is exactly the same to all heads. They are on a level playing field as a cohesive unit if called upon to make either objective or selective judgments.


Boeing engineers also use ‘informating’, which they describe as a collaborative, distributed and multimodal system. Their perspective is slightly different, as should be the case in two vastly differing industries. Boeing believes informating strategies emerge as industries move beyond an emphasis on productive efficiency, where ‘automating’ strategies tend to be at the forefront− like the production of Intel chips− to an emphasis on innovation and competitive advantage in which interpretation and manipulation of information to suit the organisation’s aims can be as important as the production of material goods.

Automating technologies seek to extract productive value (skill, technique, strength) from human bodies and invest them in machines, making human labour superfluous. Informating technologies− for example electronic mail and bulletin boards, telecom networks, etc. also extract or externalise workers' activity (e.g. planning and discussion,) but they do not seek to replace workers; they are meant to augment or enhance a worker's performance.

There is an inexorable but welcome concomitant to informating: A change in workplace ethos. Informating addresses the changing roles among managers and workers that occur with the influx of information technologies. In the informated work milieu, quite different from an industrial area of operations – a trio of specific operating conditions needs to be met.

1.   Managers must ‘release’ workers to explore and interpret patterns in the central database's content. In many cases, this means that managers must loosen their grip on authority to give way to a more decentralised work environment. Workers should be encouraged to look for underpinning patterns that contribute to innovation and new directions and rewarded for their discovery.

2.   Workers need access to participate. This mandates that systems' computer expertise be decentralised and distributed throughout the organisation so that workers have more direct, ongoing access to key, raw data, i.e. resources.

3.   The management must make a conscious effort to develop and to train workers so they can determine context within the informational stockpile and participate in the planning process; this is especially valid at the brainstorming level.

The flexibility of Web tools for managing multimedia content, the relatively little staff required to design and maintain a site, and the technology's inherent accessibility by most users are the primary reasons behind the growing popularity of Web-based tools for informating projects. Interestingly, research has shown that information professionals - whether they are working in a corporate library or in another department as Webmasters - play a key role in designing and/or and maintaining a company's central information resource and in carrying out the informating process. Typically, the core database is the history of the organisation since inception. Even more interesting is a report that by placing most of their core database as ‘current awareness’ on their Web site, an organisation added a strategic edge by off-loading a lot of repetitious tasks/responses and directly saved millions of dollars annually in support calls.

Judging from the evaluation and analysis presented supra, there is no need to fear that e-business will morph to its retrogressive past by going back to the earlier wave of automation,  with systems that either replace people or reduce the amount of skill that people need to do with systems that either replace people or reduce the amount of skill that people need to do their jobs.

Zorayda Ruth Andam, in her Report on the e-ASEAN Task Force UNDP-APDIP (2003), writes, “In the emerging global economy, e-commerce and e-business have increasingly become a necessary component of business strategy and a strong catalyst for economic development. The integration of information and communications technology (ICT) in business has revolutionised relationships within organisations and those between and among organisations and individuals. Specifically, the use of ICT in business has enhanced productivity, encouraged greater customer participation, and enabled mass customisation, besides reducing costs” ( p.5).

Andam first defines e-commerce as a wide range of online business activities for products and services. It also pertains to any form of business transaction in which the parties interact electronically rather than by physical exchanges or direct physical contact. (p.6)

E-commerce is usually associated with buying and selling over the Internet, or conducting any transaction involving the transfer of ownership or rights to use goods or services through a computer-mediated network. Though used often, this definition is not exhaustive enough to integrate latest developments in this new and revolutionary business phenomenon. A more complete definition is: E-commerce is the use of electronic communications and digital information processing technology in business transactions to create, transform, and redefine relationships for value creation between or among organisations, and between organisations and individuals.

Interestingly, e-business also deals with commercial transactions over the net. It has the same parameters, viz., Buyer, Seller or Provider, Internet contact and contract, Product and Sale. On the topic of whether the Internet economy is synonymous with e-commerce and e-business, she writes that the Internet economy is a broader concept than e-commerce and  e-business. It includes e-commerce and e-business.

Andam defines e-business as: 'The transformation of an organization’s processes to deliver additional customer value through the application of technologies, philosophies and computing paradigm of the new economy.' Surely, this is just a matter of semantics, a play of words. What then is the difference between e-commerce and e-business?

Andam explains that internet economy pertains to all economic activities using electronic networks as a medium for commerce or those activities involved in both building the networks linked to the Internet and the purchase of application services such as the provision of enabling hardware and software and network equipment for Web-based/online retail and shopping malls (or 'e-malls'). It is made up of three major segments: physical (ICT) infrastructure, business infrastructure, and commerce. The CREC (Center for Research and Electronic Commerce) at the University of Texas has developed a conceptual framework for how the Internet economy works. The framework shows four layers of the Internet economy-the three mentioned above and a fourth called intermediaries. 

Let’s look at the components of the four layers.

Layer 1: Internet Infrastructure: Companies that provide the enabling hardware, software, and networking equipment for Internet and for the World Wide Web.

Layer 2: Internet Applications Infrastructure: Companies that make software products that facilitate Web transactions; companies that provide Web development design and consulting services.   

Layer 3: Internet Intermediaries: Companies that link e- commerce buyers   and sellers;companies that provide Web content; companies that provide marketplaces in which e-commerce transactions can occur.

Layer 4: Internet Commerce Companies that sell products or services directly to consumers or businesses. There is no mention of e-businesses here! Does Andam imply e-commerce has the same factors or components as e-business? Or that they are the same in different guises? No, we need to go back to basics here. I’ll give you a hint: Read page 7 of Andam’s PDF carefully.

If you want a slightly clearer understanding of the two, just remember that e-commerce is a subset of e-business. “E-business goes far beyond e-commerce or buying and selling over the Internet, and deep into the processes and cultures of an enterprise. It is the powerful business environment that is created when you connect critical business systems directly to customers, employees, vendors, and business partners, using Intranets, Extranets, e-commerce technologies, collaborative applications, and the Web.” Read about it online at: ( and_ebusiness.asp). I don’t think you will have doubts anymore.

Globalization along with the boom of the internet era has led to the exponential growth of the eCommerce sector in the past two decades. The growth of the eCommerce sector has in turn become a catalyst for the growth of the economy as a whole. The impact that the internet has on the industry structure, as well as the competitive forces in the market, are as explained below:

  • There is an increased rivalry among the existing competitors. As there is no geographical limitation for a virtual marketplace, the competitors can be from anywhere across the globe. This has led to a considerable increase in the number of competitors when it comes to eCommerce.
  • The bargaining power of buyers has increased. There are quite a lot of products available in the market for a wide range of prices. This is because of a huge reduction in the switching cost and the powerful channels existing in the chain have also been removed.
  • The bargaining power of the suppliers has also increased. Suppliers now do not have to depend on the wholesalers or manufacturers to get a deal to supply the products or raw materials. The internet has made it possible for the suppliers to come closer to the customers and the procurement process has also become easier.
  • The barriers to entry have been drastically decreased. Any company or manufacturer willing to sell their product can do it so easier with the help of the internet. There is no significant barrier to entry present in the current market structure.
  • Threats to substitutes have increased considerably. As discussed before, there are a lot of sellers available on the internet who offer the same product or close-enough substitutes. Because of this, customers switch from one company to another without giving it much thought.
  • Disintermediation: eCommerce has eliminated traditional intermediaries in the supply chain, such as wholesalers and retailers. This has led to a reduction in cost and increased efficiency in the production and delivery of goods and services.
  • Disruption of Traditional Business Models: The Internet has disrupted many traditional business models. Many businesses that ignored the digital revolution have faced severe challenges in meeting changing customer needs and adapting to new challenges.

E-commerce and e-Business are similar but not synonymous. E-commerce narrowly refers to buying and selling products online, whereas e-business defines a wider range of business processes, including supply chain management, electronic order processing and customer relationship management, designed to help companies operate more effectively and efficiently. E-commerce therefore should be considered a subset of e-business.

E-commerce describes any part of the business processes associated with online ordering and purchasing. An e-commerce transaction, for example, would be a customer ordering online and picking up the product at the brick-and-mortar store. By contrast, e-business processes can be handled in-house through a company's internal network or outsourced to providers that specialize in specific parts of the transaction.

IT business analysts can interpret working data, analyse key metrics, gauge the implications of changes in the supply chain environment and share these insights with senior management and other employees. They can also develop new processes based on the needs of relevant stakeholders.

Information is built on the automation process: today, to automate also means to ‘informate’. The automatic collection of data enables the recording of many more details. So automating the front end of a business provides an opportunity in the back end of the business to make better decisions with the information gathered.


Saturday 16 September 2023


 Consumer Surplus and How it is Extracted               Using Two-Part Tariffs


Consumer Surplus is the difference between the price that a consumer is willing to pay for a good and the amount he actually pays. Consumer Surplus is thus the utility for consumers  able to purchase a product for a price that is less than the highest price they would be willing to pay. Conversely, Producer Surplus is the amount that producers benefit by selling at a market price mechanism that is higher than the least that they would be willing to sell for. At some point, no producer surplus accrues to the seller. Economic profit is driven to zero and that item is either taken off the shelf and /or disposed off in ‘Sales Season’. Consumer Surplus is of singular importance in understanding the Microeconomic term “Two-part Tariff’.


A number of pricing techniques are used to determine the best returns for a product or service. One example is ‘Premium Pricing’, where an exorbitant sum is charged for brand value or exclusivity of the product, like LVMH multi-brand products, Chanel's creative modernity goods, Rolex watches or Rolls Royce cars.

Another, Penetration Pricing, sees market penetration by an agency by undercutting all competitors at a deliberately set low price, a painful reminder of Chinese dominance of the global apparel market during the ATC (quota) phase, Netflix and Costco.

Barring China, once targeted market density is achieved, the price may be raised in quick stages to prevailing or slightly higher levels to recover losses incurred and get into the black. Many sellers allow the repayment of the cost in instalments, at some fixed rate of interest. International giants, like Amazon, have internal arrangements with select Banks which often do not charge any interest for repayment in instalments or offer dicounts if the buyer uses/switches to their Credit/Debit Card. Consumer Surplus is essentially a form of profit and marketers target it, by using specific pricing methods, one of which is Two-part Tariffs.

Consumer Surplus is the difference between the price that a consumer is willing to pay for a good and the amount he actually pays. From another angle, Consumer Surplus is the utility for consumers by being able to purchase a product for a price that is less than the highest price that they would be willing to pay. Conversely, Producer Surplus is the amount that producers benefit by selling at a market price mechanism that is higher than the least that they would be willing to sell for. At some point, no producer surplus accrues to the seller. Economic profit is driven to zero and that item is either taken off the shelf and / or disposed off in ‘Sales Season’. Consumer Surplus is of singular importance in understanding the Microeconomic term “Two-part Tariff’.

Other Relevant Factors

Pindyk, Rubinfeld and Mehta, in their book: Microeconomics Sixth Edition, define Consumer Surplus as “the difference between the price that a consumer is willing to pay for a good and the amount actually paid” (107). A two-part tariff (TPT) has many interpretations, one of which is: “A form of pricing in which consumers are charged both an entry and a usage fee” (ibid 317). There is more to two-part tariffs than described. It is essential to understand certain associated economic factors before getting at the rather complex topic. In this article, I will explain in brief Consumer Surplus, Producer Surplus, Market Equilibrium, Demand Curve, Consumer Surplus and Demand, Monopoly and Pricing Strategies with Market Power. Two-part tariffs and consumer surplus are closely linked; I will explain what two-part tariff means in practical terms and show how firms try to extract consumer surplus using it.

Consumer Surplus

The public purchases goods only if there is some benefit to be had. Consumer surplus is a valuation of how much benefit individuals gain as a total on completing their purchase of the product in question. It is a measure of the welfare that people gain from the consumption of goods and services, or a measure of the benefits they derive from the exchange of goods. Most people have differing methods of evaluating the intrinsic value of a good. Such extraneous factors, apart from purely commercial reasons, decide for these individuals the maximum price they are willing to fork out for an item. If an individual is willing to pay US$ 100 for a pair of Reebok shoes but manages a marked down version for $ 40; his consumer surplus is $60 (Refer definition of consumer surplus).

                                     Figure 1 : Consumer Surplus

In the figure above, Consumer Surplus is the area shaded red, under the demand curve & above the price.

Producer Surplus

Producer surplus is the difference between what the producer receives for the good and the amount he/she must receive to be willing to provide the good. It is the area above the supply curve & below the price. In Figure 2 below, Consumer Surplus is the area shaded green.

                                     Figure 2: Producer Surplus

Market Equilibrium

Total social welfare is the sum of consumer surplus and producer surplus. Both the consumers and the producers want to maximise their surplus leading to efficient allocation of resources to produce the product which maximises the total benefit to the society. This happens when Market Equilibrium prevails.

                                           Figure 3: Market Equilibrium

At any other point other than the equilibrium, caused by a variation in surplus at either end will lead to the total surplus reducing below the optimal as depicted.

Demand Curve

The demand curve is a graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule. (O'Sullivan and Sheffrin 2003).

                              Figure 4

The point at which the demand and supply curves intersect is called the Point of Economic Equilibrium. This is the price at which seller gains optimal profit in a competitive market.  Variations can take place in the market.

The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.

The four basic laws of supply and demand are:

  • If demand increases and supply remains unchanged, then it leads to higher equilibrium price and higher quantity.
  • If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and lower quantity.
  • If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity.
  • If supply decreases and demand remains unchanged, then it leads to higher equilibrium price and lower quantity.

The demand curve for all consumers is projected by simply consolidating individual demands at each price. Demand curves are used to estimate behaviours in competitive markets, and are combined with supply curves to assess the equilibrium price, or market clearing price, where the demand is equal to the supply, depicted as the point where the demand and supply curves meet. Profit margins are optimal at this point and retailers are free to manipulate prices according to endemic conditions. The same item can be bought at steep costs in up-market areas and at far more reasonable prices at normal stores. The graph shows how demand tails off rapidly above this price.

The producer continues to makes his profit at any point on the curve, since he works on volume distributed to multiple retailers and the profit margin he has added for the product. His cut-off point is at a much lower price, as seen on Figure 1. Note that the supply curve is close to being a straight line, while the demand curve does actually curve.

Consumer Surplus and Demand

According to Pindyk et al., “A demand curve is the relationship between the quantity of a good consumers are willing to buy and the price of that good” (ibid, 18). They add, “It is fairly simple to calculate consumer surplus if the corresponding demand curve is known and their relationship can be examined” (ibid, 107). Let us do so for an individual, as advised by the authors.

In the stated example, the consumer could muster $100 for his pair of Reebok shoes. Let us assume he has four family members and a close friend who would also like to buy those shoes. Utilising his consumer surplus of $60, he could get them, who have available resources of $75-$80, to also buy the said shoes (refer Figure 2). With each buy, the consumer surplus keeps increasing, till at one stage it reaches a total of say, $100. Assume that his friend can afford only $20. He can now give $20 to his friend and then buy two more pairs as gifts for other friends. In effect, he and his coterie kept buying shoes as they were being subsidised by consumer surpluses. They ultimately bought eight pairs of shoes @ $40 each, at one time having an overall consumer surplus of $100, all of which went back into more shoes. Note that they wanted to buy the shoes. If the buyer was satisfied with only two pairs, he would retain some surplus funds. It is this consumer surplus that the two-part tariff attacks.


Before we get to monopoly, it would be prudent to understand the working of a ‘perfectly competitive market’. According to Sen (159), “A perfectly competitive market is an intensely competitive market where firms sell homogenous products. The outputs of all firms are identical from the standpoint of buyers.” Moreover, “The number of buyers and sellers in the market is large; the actions of one agency will have little or no bearing on trading and all agents have perfect information” (ibid).

The other extreme is where one firm rules the roost, with no competition. “Such an industry is called a monopoly” (ibid 180). In effect, a monopolist sets all prices since he has no competition. His predatory pricing leaves little room for consumer surplus, absorbing it almost fully as additional profit. The Polaroid camera was one example. Current examples in the half-witted US market are frozen shrimp and steel nails shipped from India and lemon juice from South Korea.

Pricing Strategies with Market Power

So far we have assumed that the monopolist charges a flat rate. If he can charge different customers different rates for the same product, he gets a chance to make a greater profit. In an upscale market, he charges his customers the maximum he can extract from them. The same price will be prohibitive in a low-brow market. In this market, he charges a lower price, but still the highest he can extract from the less affluent customers. This is a simple example of price discrimination. According to Sen, three conditions must be met to ‘price discriminate’ successfully (202).

These are:

1. The firm has market power. A perfectly competitive firm can never ‘price discriminate’.

2. The firm must be able to separate buyers into groups which can be charged different rates.

3. The firm must be able to prevent arbitrage. Low cost buyers should not be able to sell their purchases in upscale markets.

There are various types and degrees of price discrimination. These, however, fall outside the purview of this paper. What needs to be noted is that their basic aim is the same: to extract the maximum consumer surplus.

The Two-part Tariff

Pindyk et al., state, “The two-part tariff is related to price discrimination and provides another means of extracting consumer surplus” (317). All consumers pay cash down to buy a base product. They then pay extra for each section of the good they intend to use. Discotheques charge two-part tariffs with gay abandon. Entry is at a moderate cost, conditional to buying a minimum of two drinks at the bar. Each drink costs the same, whether it is a soda or beer, and is a rip-off. “All clubs that have members charge two-part tariffs: Annual membership fee plus facility usage fee” (ibid). The Dutch firm Makros is an example where apparel is considered. The stores are open only to paid registered members to gain entry to the store. Unit costs inside are very low, when compared to ruling market prices. A number of online stores also come into this category, like the Malaysian Lelong.

Technically speaking, "two-part tariff" is somewhat of a misnomer, since tariffs are taxes on imported goods. for most purposes, you can just think of "two-part tariff" as a synonym for "two-part pricing," which makes sense since the fixed fee and the per-unit price do in fact constitute two parts.

The two-part tariff has a few posers. “How should a firm assess entry and usage fees? Given the fact that the firm has some market power, should it go for a high entry fee coupled with low usage fees, or the other way around?” (Pindyk et al., 318). The solution needs a deeper understanding of the concepts involved:

Case I: One Consumer

A single consumer’s demand curve can be easily traced. If some other consumers have identical demand curves, they can be clubbed into this bracket. The firm has only one aim in mind: To extract as much consumer surplus as possible. In this case, the solution is simple. Pindyk et al., suggest that “Usage fee (U*) should be set at the Marginal Cost (MC; cost of one addition of a good) and the entry fee (E*) equal to the total consumer surplus for that customer / group of identical consumers. The customer pays U* as usage fee and multiples of U* per extra unit used” (318). A firm operating this way will absorb all consumer surplus.

Case II: Two Consumers

In this case, there are two different people or two sets of different people with identical demand curves. The limitation here is that the firm can fix only one E* and one U*. This implies that setting U* equal to MC will no longer be a viable related to the finances of the person/group of persons who have the lower demand. If their requirements are overlooked and they are charged what the other group (the larger demand group) is paying, they will not buy the product or simply opt out. The net result will be the realisation of a less than optimum profit.

Pindyk et al., suggest that “The firm should set usage fee above marginal cost and then set the entry fee equal to the balance consumer surplus with the consumer having the smaller demand.” (318). There remains the question of valuation. To arrive at close to exact values of the two fees, the firm “will need to know the two demand curves, apart from its marginal cost. It can then write its profit as a function of U* and E* and select the two numerical values that maximise this function” (ibid).

Case III: Multiple Consumers

A large number of firms have to deal with a mixed bag of customers, with accompanying varied demands. Since the numbers of variables are too large to accommodate in a clear cut formula, an ideal two-part tariff cannot be served on a platter. A fair number of give and take experiments will become necessary.

Trade-offs will appear on the solution screen. Pindyk, Rubinfeld and Mehta explain: “A lower entry fee means more entrants and increased income” (319).

The risk lies in how low the entry fee is capped at. If E* is fixed below a certain value, the income no longer remains cost-effective. The problem is to derive an E*that provides the ideal number of entrants, translating into highest profit. “This can be done by setting a particular sales price, finding the optimum E* and estimating resultant profit” (ibid). The authors advise, “Change the sales price, calculate the corresponding E* and evaluate the new profit level. By iterating in this manner, the optimal two-part tariff can be arrived at” (319).

Awareness of MC and the summative demand curve is insufficient data to create any sort of understandable graphic representation. “Though it is not possible to determine the demand curve of every consumer, an idea of the variance in parameters would be of help” (ibid). “If their demand curves follow some identifiable pattern, set the price close to MC and make E* large to capture the maximum possible consumer surplus,” advise Pindyk et al., (ibid). If no pattern is discernible, a less than optimum solution will have to be adopted, which is to “Set the price well above MC, charge a lower entry fee and accept the capture of a lower consumer surplus” (ibid).

Comparison With Monopoly Pricing

In general, the per-unit price for a good will be lower under a two-part tariff than it would be under traditional monopoly pricing. This encourages consumers to consume more units under the two-part tariff than they would under monopoly pricing. The profit from the per-unit price, however, will be lower than it would have been under monopoly pricing since otherwise, the producer would have offered a lower price under regular monopoly pricing. The flat fee is set high enough to at least make up for the difference but low enough that consumers are still willing to participate in the market.

A Basic Model

       Figure 5

As stated, a two-part tariff will see per-unit price equal to marginal cost (or the price at which marginal cost meets the consumers' willingness to pay) and then set the entry fee equal to the amount of consumer surplus that consuming at the per-unit price generates. (Note that this entry fee is the maximum amount that could be charged before the consumer walks away from the market entirely). Jodi Beggs, writing for ThoughtCo in 2019 believes that the difficulty with this model is that it implicitly assumes that all consumers are the same in terms of willingness to pay, but it is still a helpful starting point.

Such a model is depicted above. On the left is the monopoly outcome for comparison - quantity is set where marginal revenue is equal to marginal cost (Qm), and the price is set by the demand curve at that quantity (Pm). Consumer and producer surplus (common measures of well being or value for consumers and producers) are then determined by the rules for finding consumer and producer surplus graphically, as shown by the shaded regions.

On the right is the two-part tariff outcome as described above. The producer will set price equal to Pc (named as such for a reason that will become clear) and the consumer will buy Qc units. The producer will capture the producer surplus labeled as PS in dark grey from the unit sales, and the producer will capture the producer surplus labelled as PS in light grey from the fixed up-front fee.


     Figure 6

It's also helpful to think through the logic of how a two-part tariff impacts consumers and producers, so let's work through a simple example with only one consumer and one producer in the market. If we consider the willingness to pay and marginal cost numbers in the figure above, we will see that regular monopoly pricing would result in 4 units being sold at a price of $8. (Remember that a producer will only produce as long as marginal revenue is at least as large as marginal cost, and the demand curve represents a willingness to pay.) This gives consumer surplus of $3+$2+$1+$0=$6 of consumer surplus and $7+$6+$5+$4=$22 of producer surplus.

Alternatively, the producer could charge the price where the consumer's willingness to pay equals marginal cost, or $6. In this case, the consumer would purchase 6 units and gain consumer surplus of $5+$4+$3+$2+$1+$0=$15. The producer would gain $5+$4+$3+$2+$1+$0=$15 in producer surplus from per-unit sales. The producer could then implement a two-part tariff by charging a $15 up-front fee. The consumer would look at the situation and decide that it's at least as good to pay the fee and consume 6 units of the good than it would be to avoid the market, leaving the consumer with $0 of consumer surplus and the producer with $30 of producer surplus overall. (Technically, the consumer would be indifferent between participating and not participating, but this uncertainty could be resolved with no significant change to the outcome by making the flat fee $14.99 rather than $15.)

One thing that is interesting about this model is that it requires the consumer to be aware of how her incentives will change as a result of a lower price: if she didn't anticipate purchasing more as a result of the lower per-unit price, she would not be willing to pay the fixed fee. This consideration becomes particularly relevant when consumers have a choice between traditional pricing and a two-part tariff since consumers' estimates of purchasing behavior have direct effects on their willingness to pay the up-front fee.

Cost Effectiveness

           Figure 7

One thing to note about a two-part tariff is that, like some forms of price discrimination, it is economically efficient (despite fitting many people's definitions of unfair, of course). You may have noticed earlier that the quantity sold and per-unit price in the two-part tariff diagram were labeled as Qc and Pc, respectively- this is not random, it is instead meant to highlight that these values are the same as what would exist in a competitive market. As the above diagram shows, total surplus (i.e. the sum of consumer surplus and producer surplus) is the same in our basic two-part tariff model as it is under perfect competition, it is only the distribution of surplus that is different.  This is possible because the two-part tariff gives the producer a way to recoup (via the fixed fee) the surplus that would be lost by lowering the per-unit price below the regular monopoly price.

Because total surplus is generally greater with a two-part tariff than with regular monopoly pricing, it is possible to design a two-part tariff such that both consumers and producers are better off than they would be under monopoly pricing. This concept is particularly relevant in situations where, for various reasons, it is prudent or necessary to offer consumers the choice of regular pricing or a two-part tariff.


In this paper, I have explained consumer surplus and shown that it is essentially a measure of potential profit. I have discussed pricing strategies in brief, including price discrimination, leading to the implementation of two-part tariffs. I have shown that the two-part tariff is not a cut and dried profit extraction policy, beset, as it is, by a host of variables. In each case, I have arrived at and explained the optimal method of extracting consumer surplus from the consumer, as well as its implementation by producers of a good or product. As long as there are market forces reaching out for consumer surplus, two-part tariffs are here to stay.

Works Cited

Pindyk, Robert. S; Rubinfeld, Daniel. L and Mehta, Prem.L. Microeconomics Sixth Edition. Delhi: Dorling Kindersley(India), 2006. Print.

Sen, Anindya. Microeconomics Theory and Applications. Delhi: Oxford UP, 2006. Print

Jodi Beggs;