The Psychology of Two-Part Tariffs

Abstract

This paper investigates preferences for two-part tariff pricing plans which require consumers to pay a flat fee plus a per unit surcharge for usage beyond an allowance. People have difficulty estimating the effective cost of a two-part tariff, so they apply heuristics to the most salient attributes. Compared to a normative benchmark of expected cost, these heuristics lead people to excessively choose plans with smaller flat fees, larger usage allowances, and lower overage rates. When these attributes are in conflict, people assign greater importance to comparisons of the two attributes that provide upside protection against overage charges: the usage allowance and the overage rate. The presence of usage uncertainty heightens the reliance on these comparisons, and calculating a cost does not appear to reduce them. 3 Firms frequently use nonlinear pricing plans, where the mapping from quantity purchased to total price is not a strictly linear function. An example is a two-part tariff1 which consists of an upfront flat fee plus a per unit surcharge for usage beyond an allowance. Increasingly we see the use of such two-part tariffs in consumer settings such as cell phones, car rentals and leases, utilities, time shares, etc. The popularity of these plans has been linked to a number of benefits that include legally implementing price discrimination, managing capacity, meeting consumer expectations of quantity discounts, encouraging greater volume commitments, passing on declining per unit service costs, and creating incentives for consolidating volume

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 5 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.