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The Doubtful Profitability of Foggy Pricing

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  • Miravete, Eugenio J

Abstract

A particular tariff option is said to be foggy when another option or a combination of other tariff options offered by the same firm is always less expensive regardless of the usage profile of any customer. Alternatively, tariff fogginess may refer to the whole set of tariff options and it is related to the low likelihood that a particular tariff option ends up being the least expensive one among those of a menu of tariff plans for an arbitrary distribution of usage patterns. This paper takes advantage of the exogenous entry of a second carrier in the early U.S. cellular telephone industry. It shows that competition induces firms to introduce mostly non-foggy options, thus abandoning deceptive pricing strategies (fog lifting) aimed to profit from mistaken choices of consumers rather than softening competition through the use of foggy tactics (co-opetition). Results indicate that tariff fogginess is less severe with the entry of a second firm in the industry according to either definition of foggy pricing. Thus competition alone, and in particular the tactics of entrants, appears to correct deceptive pricing strategies, although such correction does not necessarily occur immediately after the entry of a competitor but rather in the long run. Results are robust to the existence of individual uncertainty regarding future telephone usage when consumers sign up for a particular tariff plan.

Suggested Citation

  • Miravete, Eugenio J, 2007. "The Doubtful Profitability of Foggy Pricing," CEPR Discussion Papers 6295, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6295
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    References listed on IDEAS

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    Cited by:

    1. Katja Seim & V. Brian Viard, 2011. "The Effect of Market Structure on Cellular Technology Adoption and Pricing," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 221-251, May.
    2. Patrick Xavier & Dimitri Ypsilanti, 2010. "Behavioral Economics and Telecommunications Policy," Chapters,in: Regulation and the Evolution of the Global Telecommunications Industry, chapter 4 Edward Elgar Publishing.
    3. Miravete, Eugenio J, 2007. "Competing with Menus of Tariff Options," CEPR Discussion Papers 6279, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Co-opetition; Fog-Lifting; Foggy Strategies; Nonlinear Pricing; Phasing-out;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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