DP4316 | Are all Those Calling Plans Really Necessary? The Limited Gains From Complex Tariffs


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This Paper uses an equilibrium model of non-linear 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 non-linear 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.