Nonlinear Pricing with Product Customization in Mobile Service Industry
AbstractThis paper proposes to incorporate product customization in the Maskin and Riley (1984) nonlinear pricing model in order to capture major features of mobile service data. In particular, consumers are characterized by a two-dimensional type. One dimension is observed by the provider and integrates product customization, while the other is a standard parameter of adverse selection, which is unobserved by the provider and makes it necessary for the provider to discriminate among consumers with different tastes through nonlinear pricing. We then propose a novel method to aggregate the multiple-dimensional voice consumption into one-dimensional index. We show that the model structure is identified under the following conditions: The marginal utility function is multiplicatively separable in consumers' tastes, and consumers' observed and unobserved heterogeneity are independent. Empirical results show that both dimensions of heterogeneity are important. Due to asymmetric information, 50% of the "second-best" social welfare is left "on the table" in order to screen heterogeneous consumers. Moreover, if costly product customization does not affect subscribers' utility, 20% of subscribers would not be served.
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Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 11-28.
Length: 34 pages
Date of creation: Sep 2011
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Web page: http://www.NETinst.org/
Nonlinear Pricing; Product Customization; Mobile Service;
Find related papers by JEL classification:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
- L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-07 (All new papers)
- NEP-COM-2011-11-07 (Industrial Competition)
- NEP-IND-2011-11-07 (Industrial Organization)
- NEP-MKT-2011-11-07 (Marketing)
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