Pricing Menu with Pareto-improving Flat Fee Option

Using a most general model, without most of the traditional assumptions employed in the screening literature, we show that supplementing any usage-based pricing with a ‡at-fee option is pro…t improving when the savings from transactions costs and/or from eliminating deadweight loss from using ‡at fee exceed the additional production costs. Further, whenever it is pro…t-improving, it is also Pareto-improving. The convenient reformulation of the problem enables one to classify markets, suitable for usage-based pricing only, or ‡at-fee only, or for a combination of both. Sometimes for ‡at-fee option to be pro…table, a “critical mass”of adopters of ‡at fee may be needed. Most conclusions not only hold for a ‡at-fee supplement, but also for any new tari¤ plan supplementing the existing pricing menu.