Multi-tier pricing in uniform and non-uniform tax/subsidy systems

Abstract

This paper examines the optimal specific tax/subsidy policy for a monopoly under multi-tier pricing. It shows, among other things, that an increase in a specific tax on any tier will raise (reduce) the cumulative output of preceding (succeeding) tiers in the non-uniform scheme. In contrast, increasing the tax under the uniform scheme will reduce the output for all tiers and their cumulative output. Furthermore, the paper derives the optimal policy locus and shows the indeterminacy of optimal tier rates in the non-uniform scheme. The case of linear/nonlinear demand and quadratic cost illuminates numerous interesting features.