Multiproduct Nonlinear Pricing: Mobile Voice Service and SMS (with Yao Luo and Quang Vuong)

Abstract:

This paper studies multiproduct nonlinear pricing in the cellular phone industry with voice and message services. The model derives from Arsmtong (1996) in which the unknown types of consumers are aggregated while the firm designs an optimal cost-based tariff. As usual in multidimensional screening problems, there is pooling at equilibrium. Moreover, given that the consumers add a large number of unobserved extra features, we introduce two terms of unobserved heterogeneity for voice and message add-ons. The model defines two one-to-one mappings between the unknown aggregate type to the cost and the cost to the payment. We then study the identification of the model primitives. Under some identifying assumptions such as a parameterization of the cost function, we show that the primitives of the model (the aggregate type density, the indirect utility and the joint density of unobserved heterogeneity) are identified from observables. The empirical results support the model and display an important heterogeneity in types and unobserved heterogeneity. The cost of asymmetric information for the firm is assessed. Counterfactuals measure the benefits of a customized tariff relative to a standard tarification with a limited number of plans that include a large number of features.