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THE DOUBTFUL PROFITABILITY OF FOGGY PRICING
(Click above to download a pdf copy of the paper)
- Abstract: Firms engage in foggy pricing when
they design tariff options in order to profit from consumer mistakes. This
paper analyzes whether the transition from monopoly to competition in the
early U.S. cellular telephone industry facilitated the use of deceptive
strategies. Results indicate that competition does not appear to foster the
use of deceptive strategies in general. The use of foggy pricing appears to
be profitable only when consumers are very bad at predicting their future
usage. Entrants always offer less foggy tariffs than incumbent firms, a
result that questions that competiton per se leads to a more frequent
use of deceptive strategies. All results are robust to the existence of
uncertainty regarding future consumption at the time of choosing a
particular tariff option, as well as to consumers' heterogeneity with
respect to cellular telephone usage. There is some evidence that that a year
after entry of the second firm, nonlinear tariffs offered by competing firms
become less powerful as predicted by theoretical models of nonlinear
pricing competition.
- Publication: Previously circulated as NET Institute Working Paper #04-07 and CEPR DP No. 6295.
- JEL: D43, L96, M21.
- First version: September 2004.
- Current version: July 2009.
- Funding: NET Institute.
- Seminars: ESMT, Haas School of Business (Berkeley), Institute for Communication Economics - Ludwig Maximilians Universität München, IESE, ITAM, Mannheim; Tokyo,; Wharton School.
- Conferences: 7th CEPR Conference on Applied Industrial Organization, Madeira, May 2006; 48th Annual Conference of the New Zealand Association of Economists.
- Presentations: PDF.
- Media Citations: None yet.
- Noteworthy: Theresa Gattung on foggy pricing; New Zealand Herald; Interesting article on deceptive strategies from CBC.
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