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Pricing Misperception: Explaining Pricing Structure in the Cellular Service Market

29 Pages Posted: 30 Jun 2009  

Oren Bar-Gill

Harvard Law School

Date Written: June 24, 2009

Abstract

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

Bar-Gill, Oren, Pricing Misperception: Explaining Pricing Structure in the Cellular Service Market (June 24, 2009). Available at SSRN: https://ssrn.com/abstract=1425046 or http://dx.doi.org/10.2139/ssrn.1425046

Oren Bar-Gill (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

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