The Doubtful Profitability of Foggy Pricing

35 Pages Posted: 22 May 2008

See all articles by Eugenio J. Miravete

Eugenio J. Miravete

University of Texas at Austin; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2007

Abstract

A particular tariff option is said to be foggy when another option or a combination of other tariff options offered by the same firm is always less expensive regardless of the usage profile of any customer. Alternatively, tariff fogginess may refer to the whole set of tariff options and it is related to the low likelihood that a particular tariff option ends up being the least expensive one among those of a menu of tariff plans for an arbitrary distribution of usage patterns. This paper takes advantage of the exogenous entry of a second carrier in the early U.S. cellular telephone industry. It shows that competition induces firms to introduce mostly non-foggy options, thus abandoning deceptive pricing strategies (fog lifting) aimed to profit from mistaken choices of consumers rather than softening competition through the use of foggy tactics (co-opetition). Results indicate that tariff fogginess is less severe with the entry of a second firm in the industry according to either definition of foggy pricing. Thus competition alone, and in particular the tactics of entrants, appears to correct deceptive pricing strategies, although such correction does not necessarily occur immediately after the entry of a competitor but rather in the long run. Results are robust to the existence of individual uncertainty regarding future telephone usage when consumers sign up for a particular tariff plan.

Keywords: Co-opetition, Fog-Lifting, Foggy Strategies, Nonlinear Pricing, Phasing-out

JEL Classification: D43, L96, M21

Suggested Citation

Miravete, Eugenio J., The Doubtful Profitability of Foggy Pricing (May 2007). CEPR Discussion Paper No. DP6295, Available at SSRN: https://ssrn.com/abstract=1136034

Eugenio J. Miravete (Contact Author)

University of Texas at Austin ( email )

Department of Economics
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Austin, TX 78712-0301
United States
512-232-1718 (Phone)
512-471-3510 (Fax)

HOME PAGE: http://www.eco.utexas.edu/facstaff/Miravete

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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