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THE LIMITED GAINS FROM COMPLEX TARIFFS
(Click above to download a pdf copy of the paper)
- Abstract: This paper uses an equilibrium model of
multipart nonlinear pricing to determine the magnitude of foregone profits
due to the implementation of simple tariff options. I then use the available
information from a cross-section of independent cellular telephone markets
to study how these foregone profits vary with markets' observable
characteristics. Results show that commercialization costs effectively limit
the number of tariff options offered to consumers. The evidence presented in
this paper suggests that firms should only offer a few tariff options if
their commercialization and product development costs are non-negligible.
More importantly, this evidence favors the use of two-part tariffs and other
simple pricing strategies in theoretical modeling in order to overcome the
analytical difficulties of the existing general models of nonlinear pricing
and thus responds to the many open questions in the area of nonlinear
pricing.
- Publication: Previously circulated as CEPR DP No. 4237.
- JEL: C39, D43, L96.
- First version: December 2003.
- Current version: September 2007.
- Funding: NSF Grant SES-0318208.
- Seminars: Arizona State, Cornell, Duke, Georgia Institute of Technology; Institute for Communication Economics - Ludwig Maximilians Universität München; Johns Hopkins, Pennsylvania and Rutgers at New Brunswick.
- Conferences: 5th CEPR Empirical Industrial Organization Meeting, Hydra, May 2004; 1st International Workshop on Models of Pricing, Utrecht Universiteit, June 2004.
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