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Nonlinear Pricing with Product Customization in Mobile Service Industry

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    Abstract

    This 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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    File URL: http://www.netinst.org/Luo_11_28.pdf
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    Bibliographic Info

    Paper provided by NET Institute in its series Working Papers with number 11-28.

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    Length: 34 pages
    Date of creation: Sep 2011
    Date of revision:
    Handle: RePEc:net:wpaper:1128

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    Related research

    Keywords: Nonlinear Pricing; Product Customization; Mobile Service;

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    1. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
    2. 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).
    3. Arun Sundararajan, 2003. "Nonlinear pricing of information goods," Industrial Organization 0307003, EconWPA.
    4. 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.
    5. 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.
    6. 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.
    7. Bernhardt, Dan & Liu, Qihong & Serfes, Konstantinos, 2007. "Product customization," European Economic Review, Elsevier, vol. 51(6), pages 1396-1422, August.
    8. 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.
    9. Guerre, E. & Perrigne, I. & Vuong, Q., 1995. "Nonparametric Estimation of First-Price Auctions," Papers 9504, Southern California - Department of Economics.
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