Tariff-Specific Preferences and Their Influence on Price Sensitivity
BuR Business Research Journal, Vol. 3, No. 1, May 2010
11 Pages Posted: 14 Jun 2010
Date Written: May 18, 2010
For many services, consumers can choose among a range of optional tariffs that differ in their access and usage prices. Recent studies indicate that tariff-specific preferences may lead consumers to choose a tariff that does not minimize their expected billing rate. This study analyzes how tariff-specific preferences influence the responsiveness of consumers’ usage and tariff choice to changes in price. We show that consumer heterogeneity in tariff-specific preferences leads to heterogeneity in their sensitivity to price changes. Specifically, consumers with tariff-specific preferences are less sensitive to price increases of their preferred tariff than other consumers. Our results provide an additional reason why firms should offer multiple tariffs rather than a uniform nonlinear pricing plan to extract maximum consumer surplus.
Keywords: pricing, nonlinear pricing, tariff choice, tariff-specific preferences, price elasticity, flat rate, three-part tariffs, flat-rate bias, pay-per-use bias
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