Optimal three-part tariff pricing and marketing strategies for consumer overconfidence

Experts in traditional pricing literature often assume that consumers are rational in their purchasing decisions, and tend to ignore the effect of psychological behavior. One of the fundamental irrational psychological behaviors is overconfidence, which refers to overestimation. The benefits of three-part tariffs under demand uncertainty caused by overconfident consumers have been demonstrated in various forms. In the present study, we investigate the design of a three-part tariff pricing plan when consumers are overconfident in the sense of overestimating their amount of service usage or consumption. An analytical model and a numerical analysis are carried out using a genetic algorithm approach to determine the optimal three-part tariff and to compare other tariff structures (e.g., two-part tariff and menu of three-part tariff) to investigate the critical factors influencing their performance. With overconfidence in consumers, service providers need clear direction on how to optimally implement a three-part pricing strategy. Specifically, we observe the effect of overconfidence on the profitability of service providers, and their other performance in general. Thus, service providers are given clear guidance on when to offer three-part tariffs and alternative structures to overconfident consumers and push marketing plans to increase their profits and market share.