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Nonlinear Pricing: Multi-Part Pricing, Self-Selecting Tariffs & Regulation

Thursday March 20, 2014, from 12:30 to 14:30
Room Fred Halliday - 1st Floor (IBEI)
Research seminar

During the late 70’s and early 80’s the series of articles on nonlinear-multipart tariffs explored the efficacy in the welfare effects of these prices. They found that multi?part prices could improve consumers’ surplus or welfare. In particular, non?linear prices can benefit each and every individual consumer as well as consumers in the aggregate (Willig 1978).

During the same period, articles appeared on self? selecting tariffs where the consumer picks from a menu of prices to select a pricing plan. One of the principal finding of these studies on self?selecting or optional tariffs was that individual consumers generally purchased a plan which was more expensive than they needed. In other words, consumers paid for service above their needs, and paid more than they would have if they had knowledge of perfect information about their future usage. One critical assumption of neoclassical economics is that consumers have perfect information regarding prices and usage of products. Observation of consumers’ behavior with self?selecting tariffs belies that assumption.

Today, more than ever in the Information and Communications Technology (ICT) sector, we have a variety of self?selecting packages of plans from which to choose. One must select among the various plans of cellular phone packages, broadband services, and mobile wireless devices “hot spot.” What broadband plans for DSL service, how many minutes for cellular service, what level of use for wireless data, etc. However, with the push for “competition” and deregulation, the ICT oligopolies have not been subject to price controls. Indeed, pricing regulation of these firms has been neglected. 

This paper explores the relationship between these various areas and suggests how regulators should insert their influence in policy making. Specifically, regulators should require ICT firms to be more transparent regarding their optional pricing packages. Indeed we propose that ICT firms should be required to bill their consumers the “best” price structure for their usage ex post, and not require consumers to select a package ex ante. This pricing policy would allow the society to reap the saving and welfare benefits of nonlinear pricing.

Seminar IBEI Telefonica Alleman-Jung