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 Constrained Monopoly Pricing with Random Participation
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  • Abstract: We present a flexible model of monopoly nonlinear pricing with endogenous participation decisions of heterogeneous consumers. We make use of the moments that define the few self-selecting tariff options that are commonly used to implement the optimal nonlinear tariff to estimate how demand and cost variables affect the pricing strategies offered by incumbent monopolists in several early U.S. local cellular telephone markets through the different elements of the theoretical model: marginal costs, average price sensitivity of demand, indexing parameters governing the distribution of the two-dimensional type components, support of the distribution of types, and costs associated to the commercialization of tariff options. The sources of identification are the position and shape of each tariff offered by monopolists, the actual number and features of the tariff options used to implement them, as well as a measure of market penetration in each cellular market during the first and last quarter of monopoly regime. We use our model and the structural estimates to provide a performance comparison (profit+welfare) of nonlinear tariffs relative to linear (uniform), optimal two-part, Coasian marginal cost-plus fixed fee, and flat tariffs. We furthermore evaluate the potential welfare gains of implementing universal service requirements.

  • Co-author: Gabriel Basaluzzo (Universidad de San Andrés).

  • Publication: Previously circulated as CEPR DP No. 6620.

  • JEL: C63, D43, D82, L96.

  • First version: August 2004.

  • Current version: December 2007.

  • Funding: NSF Grant SES--0318208.

  • Seminars: Universities at Auckland, Carlos III de Madrid; Canterbury at Christchurch; Harvard; ITAM; LSE; Minnesota; Northwestern; Olin School; Otago at Dunedin; Purdue; Pennsylvania; Rutgers at New Brunswick; Southern California; Texas A&M; Toronto; Valencia; Vanderbilt; Victoria at Wellington; Wisconsin-Madison; Yale.

  • Conferences: 7th Workshop on the Economics of Information and Network Industries, Munich 2004; IO Day at NYU Stern School of Business, New York 2004; Workshop on "Aggregation and Disaggregation: Characterization and Identification of Collective Demand," Banff 2005; Areces Foundation Conference on Industrial Organization and Competition Policy, Madrid 2005; 7th CEPR Conference on Applied Industrial Organization, Madeira, May 2006.

  • Presentations: PDF.