Estimating the Demand for Service Bundles under Three-Part Tariffs

52 Pages Posted: 9 Apr 2019 Last revised: 2 Jun 2019

See all articles by Liang Chen

Liang Chen

Wuhan University

Yao Luo

University of Toronto - Department of Economics

Ping Xiao

Deakin University - Faculty of Business and Law

Date Written: March 17, 2019

Abstract

The practice of selling multiple products or services under nonlinear pricing has a long history in the business community. Consumers may face demand uncertainty when choosing a service plan, and preferences for multiple products or services may be inter-dependent. To examine a demand system with these features, we construct a two-stage discrete/continuous choice model for service bundle demand under three-part tariffs, allowing for interactive utility and preference correlations. Implementing a piecewise maximization approach to the consumer utility maximization problem, which is non-differentiable under three-part tariffs, we estimate the model via simulated method of moments. We then apply our model to data from a major wireless service provider in China. Finally, our counterfactual analysis simulates outcomes under three-part tariffs with interchangeable units. Compared to existing tariffs, the proposed ones contain fewer instruments without a significant loss of revenue. We also illustrate the implications of incorporating ex-post usage shocks in model estimates, elasticities and counterfactual outcomes.

Keywords: Three-Part Tariffs, Bundling, Mobile Services, Interchangeable Units

JEL Classification: L11, L96

Suggested Citation

Chen, Liang and Luo, Yao and Xiao, Ping, Estimating the Demand for Service Bundles under Three-Part Tariffs (March 17, 2019). Available at SSRN: https://ssrn.com/abstract=3353982 or http://dx.doi.org/10.2139/ssrn.3353982

Liang Chen

Wuhan University ( email )

Wuhan
China

Yao Luo

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada

Ping Xiao (Contact Author)

Deakin University - Faculty of Business and Law ( email )

Burwood, Victoria 3215
Australia

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