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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 11-28.
Length: 34 pages
Date of creation: Sep 2011
Date of revision:
Contact details of provider:
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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- James J. Heckman & Rosa L. Matzkin & Lars Nesheim, 2010.
"Nonparametric Identification and Estimation of Nonadditive Hedonic Models,"
Econometric Society, vol. 78(5), pages 1569-1591, 09.
- James J. Heckman & Rosa L. Matzkin & Lars Nesheim, 2009. "Nonparametric Identification and Estimation of Nonadditive Hedonic Models," NBER Working Papers 15226, National Bureau of Economic Research, Inc.
- Heckman, James J. & Matzkin, Rosa & Nesheim, Lars, 2009. "Nonparametric Identification and Estimation of Nonadditive Hedonic Models," IZA Discussion Papers 4329, Institute for the Study of Labor (IZA).
- Miravete, Eugenio J, 2002.
"Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans,"
Review of Economic Studies,
Wiley Blackwell, vol. 69(4), pages 943-71, October.
- Miravete, Eugenio J, 2000. "Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans," CEPR Discussion Papers 2635, C.E.P.R. Discussion Papers.
- Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
- Guerre, E. & Perrigne, I. & Vuong, Q., 1995. "Nonparametric Estimation of First-Price Auctions," Papers 9504, Southern California - Department of Economics.
- Bernhardt, Dan & Liu, Qihong & Serfes, Konstantinos, 2007. "Product customization," European Economic Review, Elsevier, vol. 51(6), pages 1396-1422, August.
- Miravete, Eugenio J & Röller, Lars-Hendrik, 2003. "Competitive Non-Linear Pricing in Duopoly Equilibrium: The Early US Cellular Telephone Industry," CEPR Discussion Papers 4069, C.E.P.R. Discussion Papers.
- Gaurab Aryal & Isabelle Perrigne & Quang Vuong, 2011. "Identification of Insurance Models with Multidimensional Screening," ANU Working Papers in Economics and Econometrics 2011-538, Australian National University, College of Business and Economics, School of Economics.
- Arun Sundararajan, 2003. "Nonlinear pricing of information goods," Industrial Organization 0307003, EconWPA.
- Sankar, Ulaganathan, 1970. "Elasticities of Substitution and Returns to Scale in Indian Manufacturing Industries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 399-411, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nicholas Economides).
If references are entirely missing, you can add them using this form.