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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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Paper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 012.

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Date of creation: Mar 2011
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Handle: RePEc:zur:econwp:012
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  1. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  2. repec:cup:cbooks:9780521536721 is not listed on IDEAS
  3. Jean-Charles Rochet & Lars A. Stole, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 277-311.
  4. Botond Koszegi & Matthew Rabin, 2005. "A Model of Reference-Dependent Preferences," Levine's Bibliography 784828000000000341, UCLA Department of Economics.
  5. repec:cup:cbooks:9780521551847 is not listed on IDEAS
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