Does Uncertainty Matter? Consumer Behaviour Under Three-Part Tariffs

Marketing Science, Vol. 26, No. 5, pp. 698-710, September-October 2007

13 Pages Posted: 8 May 2006 Last revised: 30 Nov 2011

See all articles by Anja Lambrecht

Anja Lambrecht

London Business School

Katja Seim

Yale School of Management

Bernd Skiera

Goethe University Frankfurt

Abstract

In communication, information, and other industries, three-part tariffs are increasingly popular. A three-part tariff is defined by an access price, an allowance, and a marginal price for any usage in excess of the allowance. Empirical nonlinear pricing studies have focused on consumer choice under two-part tariffs. We show that consumer behavior differs under three-part tariffs and assess how consumer demand uncertainty impacts tariff choice. We develop a discrete/continuous model of choice among three-part tariffs and estimate it using consumer-level data on Internet usage. Our model extends prior work in accommodating consumer switching to competitors, thereby capturing behavior in competitive industries more accurately. Our empirical work shows that demand uncertainty is a key driver of choice among three-part tariffs. Consumers' expected bill increases with the variation in their usage, steering them toward tariffs with high allowances. Consequently, demand uncertainty decreases consumer surplus and increases provider revenue. A further analysis of consumers' responsiveness to the different elements of a three-part tariff under the provider's current pricing structure reveals that prices affect a consumer's tariff choice more than her usage quantity and that the allowance plays a strong role in consumer tariff choice. Based on our results, we derive implications for pricing with three-part tariffs.

Keywords: Nonlinear Pricing, Discrete/Continuous Choice Model, Internet Access, Three-Part Tariffs, Uncertainty

JEL Classification: M3, M30, M31, L1, L11, L86

Suggested Citation

Lambrecht, Anja and Seim, Katja and Skiera, Bernd, Does Uncertainty Matter? Consumer Behaviour Under Three-Part Tariffs. Marketing Science, Vol. 26, No. 5, pp. 698-710, September-October 2007, Available at SSRN: https://ssrn.com/abstract=899662

Anja Lambrecht (Contact Author)

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom

Katja Seim

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Bernd Skiera

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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