Optimization and Analysis of the Profitability of Tariff Structures with Two-Part Tariffs

European Journal of Operational Research, Vol. 206, Issue 3, 691-701

Posted: 6 Aug 2014 Last revised: 7 Aug 2014

See all articles by Christian Schlereth

Christian Schlereth

WHU - Otto Beisheim School of Management

Tanja Stepanchuk

Independent

Bernd Skiera

Goethe University Frankfurt

Date Written: 2010

Abstract

Service providers often offer tariff structures with several two-part tariffs that consist of a fixed fee and a usage price, such that consumers may pick the tariff they prefer. Prices of tariffs have significant impacts on service providers’ profit, because they simultaneously influence consumers’ tariff choices and their usage. The number of tariffs also plays an important role, because more tariffs segment the market better but also increase the administrative burden and require more marketing effort. This article presents a mixed-integer nonlinear programming optimization problem to determine profit-maximizing tariffs; compares several heuristic search methods, in particular, the gradient method, stochastic search, and simulated annealing, to solve this problem; analyses the profitability of different tariff structures; and outlines the factors that drive differences in profitability across various tariff structures. The results show that especially for large samples of more than 100 consumers, simulated annealing performs best and deviates only 0.2% from the optimum. Structures with fewer two-part tariffs are generally sufficient, because additional two-part tariffs only negligibly increase service providers’ profit.

Keywords: Marketing, Pricing, Two-part tariffs, Mixed integer nonlinear programming

JEL Classification: M1, M3

Suggested Citation

Schlereth, Christian and Stepanchuk, Tanja and Skiera, Bernd, Optimization and Analysis of the Profitability of Tariff Structures with Two-Part Tariffs (2010). European Journal of Operational Research, Vol. 206, Issue 3, 691-701, Available at SSRN: https://ssrn.com/abstract=2476368

Christian Schlereth

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56719
Germany
00492616509455 (Phone)

HOME PAGE: http://www.whu.edu/digital

Tanja Stepanchuk

Independent ( email )

Bernd Skiera (Contact Author)

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt, 60323
Germany
+49 69 798 34640 (Phone)
+49 69 798 35001 (Fax)

HOME PAGE: http://www.skiera.de

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