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Uncertain Demand, Consumer Loss Aversion, And Flat-Rate Tariffs

  • Fabian Herweg
  • Konrad Mierendorff

We 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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File URL: http://hdl.handle.net/10.1111/jeea.12004
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Article provided by European Economic Association in its journal Journal of the European Economic Association.

Volume (Year): 11 (2013)
Issue (Month): 2 (04)
Pages: 399-432

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Handle: RePEc:bla:jeurec:v:11:y:2013:i:2:p:399-432
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  1. repec:cup:cbooks:9780521551847 is not listed on IDEAS
  2. repec:cup:cbooks:9780521536721 is not listed on IDEAS
  3. Rochet, Jean-Charles & Stole, Lars A, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 277-311, January.
  4. Botond Koszegi & Matthew Rabin, 2004. "A Model of Reference-Dependent Preferences," Method and Hist of Econ Thought 0407001, EconWPA.
  5. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
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