Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs

54 Pages Posted: 7 Apr 2011  

Fabian Herweg

University of Bayreuth - Faculty of Law, Business and Economics

Konrad Mierendorff

University of Zurich

Date Written: March 23, 2011

Abstract

We consider a model of firm pricing and consumer choice, where consumers are loss averse and uncertain about their future demand. Possibly, consumers in our model prefer a flat rate to a measured tariff, even though this choice does not minimize their expected billing amount - a behavior in line with ample empirical evidence. We solve for the profit-maximizing two-part tariff, which is a flat rate if (a) marginal costs are not too high, (b) loss aversion is intense, and (c) there are strong variations in demand. Moreover, we analyze the optimal nonlinear tariff. This tariff has a large flat part when a flat rate is optimal among the class of two-part tariffs.

Keywords: Consumer Loss Aversion, Flat-Rate Tariffs, Nonlinear Pricing, Uncertain Demand

JEL Classification: D11, D43, L11

Suggested Citation

Herweg, Fabian and Mierendorff, Konrad, Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs (March 23, 2011). Available at SSRN: https://ssrn.com/abstract=1799985 or http://dx.doi.org/10.2139/ssrn.1799985

Fabian Herweg (Contact Author)

University of Bayreuth - Faculty of Law, Business and Economics ( email )

Universitätsstraße 30
Bayreuth, 95447
Germany

Konrad Mierendorff

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

HOME PAGE: http://www.econ.uzh.ch/faculty/mierendorff.html

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