Nonlinear Pricing with Product Customization in Mobile Service Industry

35 Pages Posted: 24 Nov 2011

See all articles by Yao Luo

Yao Luo

University of Toronto - Department of Economics

Date Written: October 2011

Abstract

This paper proposes to incorporate product customization in the Maskin and Riley (1984) nonlinear pricing model in order to capture major features of mobile service data. In particular, consumers are characterized by a two-dimensional type. One dimension is observed by the provider and integrates product customization, while the other is a standard parameter of adverse selection, which is unobserved by the provider and makes it necessary for the provider to discriminate among consumers with different tastes through nonlinear pricing. We then propose a novel method to aggregate the multiple-dimensional voice consumption into one-dimensional index. We show that the model structure is identified under the following conditions: The marginal utility function is multiplicatively separable in consumers’ tastes, and consumers’ observed and unobserved heterogeneity are independent. Empirical results show that both dimensions of heterogeneity are important. Due to asymmetric information, 50% of the "second-best" social welfare is left "on the table" in order to screen heterogeneous consumers. Moreover, if costly product customization does not affect subscribers’ utility, 20% of subscribers would not be served.

Keywords: Nonlinear Pricing, Product Customization, Mobile Service

JEL Classification: L11, L12, L25, L96

Suggested Citation

Luo, Yao, Nonlinear Pricing with Product Customization in Mobile Service Industry (October 2011). NET Institute Working Paper No. 11-28. Available at SSRN: https://ssrn.com/abstract=1958072 or http://dx.doi.org/10.2139/ssrn.1958072

Yao Luo (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada

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