Pricing Misperception: Explaining Pricing Structure in the Cellular Service Market
29 Pages Posted: 30 Jun 2009
Date Written: June 24, 2009
The common pricing structure in the cellular service market is a three-part tariff comprising: (1) a monthly charge; (2) a number of allotted minutes – talking minutes that the monthly charge pays for; and (3) an overage charge – a per-minute price for minutes beyond the plan limit. We argue that the three-part tariff is a rational response by sophisticated carriers to consumer misperception about their cell-phone usage. In particular, the three-part tariff is advantageous to carriers, because it exacerbates the effects of consumer misperception, leading consumers to underestimate the cost of cellular service. We develop a simple model that formalizes this account. We then proceed to test our theory using a unique dataset of subscriber-level, monthly billing and usage information for 3,730 subscribers at a single wireless provider. Policy implications are discussed.
Suggested Citation: Suggested Citation