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Consumer Addressability and Customized Pricing
Marketing Science
Privacy, economics, and price discrimination on the Internet
ICEC '03 Proceedings of the 5th international conference on Electronic commerce
Communication Strategies and Product Line Design
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Nonlinear Pricing of Information Goods
Management Science
Salesforce Incentives, Market Information, and Production/Inventory Planning
Management Science
Channel Coordination in the Presence of a Dominant Retailer
Marketing Science
On the Optimality of Fixed-up-to Tariff for Telecommunications Service
Information Systems Research
Conditioning Prices on Purchase History
Marketing Science
Does Uncertainty Matter? Consumer Behavior Under Three-Part Tariffs
Marketing Science
Buyer Uncertainty and Two-Part Pricing: Theory and Applications
Management Science
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Firms that serve a large market with many diverse consumer types use discriminatory or nonlinear pricing to extract higher revenue, inducing consumers to separate by self-selecting from a large number of tariff options. But the extent of price discrimination must often be tempered by the high costs of devising and managing discriminatory tariffs, including costs of supporting consumers in understanding and making selection from a complex menu of choices. These tariff design trade-offs occur in many industries where firms face many consumer types and each consumer picks the number of units to consume over time. Examples include wireless communication services, other telecom and information technology products, legal plans, fitness clubs, automobile clubs, parking, healthcare plans, and many services and utilities. This paper evaluates alternative ways to price discriminate while accounting for both revenues and tariff management costs. The revenue-maximizing menu of quantity-price bundles can be very or infinitely large and hence not practical. Instead, two-part tariffs 2PTs, which charge a fixed entry fee and a per-unit fee, can extract a large fraction of the optimal revenue with a small menu of choices, and they become more attractive once the costs of tariff management are factored in. We show that three-part tariffs 3PTs, which use an additional instrument, the “free allowance,” are an even more efficient way to price discriminate. A relatively small menu of 3PTs can be more profitable than a menu of 2PTs of any size. This 3PT menu can be designed with less information about consumer preferences relative to the menu of two-part tariffs, which, in order to segment customers optimally, needs fine-grained information about preferences. Our analysis reveals a counterintuitive insight that more-complex tariffs need not always be more profitable; it matters whether the complexity is from many choices or more pricing instruments.