Consumer Dynamic Usage Allocation and Learning under Multi-Part Tariffs

Marketing Science, Volume 34, Issue 1, 2015

56 Pages Posted: 26 Sep 2012 Last revised: 14 Aug 2016

See all articles by Arun Gopalakrishnan

Arun Gopalakrishnan

Rice University - Jones Graduate School of Business

Raghuram Iyengar

University of Pennsylvania - Marketing Department

Robert J. Meyer

University of Pennsylvania - Marketing Department

Date Written: July 24, 2014

Abstract

Multi-part tariffs are widely favored within service industries as an efficient means of mapping prices to differential levels of consumer demand. Whether they benefit consumers, however, is far less clear as they pose individuals with a potentially difficult task of dynamically allocating usage over the course of each billing cycle. In this paper we explore this welfare issue by examining the ability of individuals to optimally allocate consumption over time in a stylized cellular-phone usage task for which there exists a known optimal dynamic utilization policy. Actual call behavior over time is modeled using a dynamic choice model that allows decision makers to both discount the future (be myopic) and be subject to random errors when making call decisions. Our analysis provides a “half empty, half full” view of intuitive optimality. Participants rapidly learn to exhibit far-sightedness, yet learning is incomplete with some level of allocation errors persisting even after repeated experience. We also find evidence for an asymmetric effect in which participants who are exogenously switched from a low (high) to high (low) allowance plan make more (fewer) errors in the new plan. The effect persists even when participants make their own plan choices. Finally, interventions that provide usage information to help participants eradicate errors have limited effectiveness.

Keywords: multi-part tariffs, dynamic allocation, consumer learning, dynamic decision making

JEL Classification: C91, D81, M31

Suggested Citation

Gopalakrishnan, Arun and Iyengar, Raghuram and Meyer, Robert J., Consumer Dynamic Usage Allocation and Learning under Multi-Part Tariffs (July 24, 2014). Marketing Science, Volume 34, Issue 1, 2015 . Available at SSRN: https://ssrn.com/abstract=2152157 or http://dx.doi.org/10.2139/ssrn.2152157

Arun Gopalakrishnan (Contact Author)

Rice University - Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Raghuram Iyengar

University of Pennsylvania - Marketing Department ( email )

700 Jon M. Huntsman Hall
3730 Walnut Street
Philadelphia, PA 19104-6340
United States

Robert J. Meyer

University of Pennsylvania - Marketing Department ( email )

700 Jon M. Huntsman Hall
3730 Walnut Street
Philadelphia, PA 19104-6340
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
197
Abstract Views
1,068
rank
155,426
PlumX Metrics