Are All Those Calling Plans Really Necessary? The Limited Gains from Complex Tariffs

29 Pages Posted: 16 Mar 2004

See all articles by Eugenio J. Miravete

Eugenio J. Miravete

University of Texas at Austin; Centre for Economic Policy Research (CEPR)

Date Written: February 2004

Abstract

This Paper uses an equilibrium model of nonlinear pricing to determine the magnitude of foregone rents due to the implementation of simplified screening mechanisms. I then study the distribution of these foregone rents conditional on observable characteristics of a large sample of independent cellular telephone markets. Estimates reveal that the sample mean of foregone profits for not offering an additional tariff option amounts only to $0.33 (1986 dollars) per subscriber although this amount declines to $0.13 if cellular carriers already offer three tariff options. But these foregone profits only represent 4% and 0.6% of the profits attainable with a fully nonlinear tariff, respectively. The evidence presented in this Paper suggests that, contrary to the current common practice, firms should only offer few tariff options if the product development costs of designing them are non-negligible.

Keywords: Multipart tariffs, imperfect screening, foregone welfare

JEL Classification: D43, L96

Suggested Citation

Miravete, Eugenio J., Are All Those Calling Plans Really Necessary? The Limited Gains from Complex Tariffs (February 2004). Available at SSRN: https://ssrn.com/abstract=509009

Eugenio J. Miravete (Contact Author)

University of Texas at Austin ( email )

Department of Economics
1 University Station C3100
Austin, TX 78712-0301
United States
512-232-1718 (Phone)
512-471-3510 (Fax)

HOME PAGE: http://www.eco.utexas.edu/facstaff/Miravete

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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