Uncertain demand, consumer loss aversion, and flat-rate tariffs
AbstractWe consider a model of firm pricing and consumer choice, where consumers are loss averse and uncertain about their future demand. Possibly, consumers in our model prefer a flat rate to a measured tariff, even though this choice does not minimize their expected billing amount—a behavior in line with ample empirical evidence. We solve for the profit-maximizing two-part tariff, which is a flat rate if (a) marginal costs are not too high, (b) loss aversion is intense, and (c) there are strong variations in demand. Moreover, we analyze the optimal nonlinear tariff. This tariff has a large flat part when a flat rate is optimal among the class of two-part tariffs.
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Bibliographic InfoPaper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 012.
Date of creation: Mar 2011
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Consumer loss aversion; flat-rate tariffs; nonlinear pricing; uncertain demand;
Other versions of this item:
- Herweg, Fabian, 2010. "Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 330, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Fabian Herweg, 2010. "Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs," Bonn Econ Discussion Papers bgse14_2010, University of Bonn, Germany.
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-02 (All new papers)
- NEP-BEC-2011-04-02 (Business Economics)
- NEP-COM-2011-04-02 (Industrial Competition)
- NEP-MKT-2011-04-02 (Marketing)
- NEP-UPT-2011-04-02 (Utility Models & Prospect Theory)
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.:
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