Optimal three-part tariff plans

Fibich, G and Klein, R and Koenigsberg, O and Muller, E (2017) Optimal three-part tariff plans. Operations Research, 65 (5). pp. 1177-1189. ISSN 0030-364X

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Service providers, such as cell phone carriers, often offer three-part tariff plans that consist of three levers: A fixed fee, an allowance of free units, and a price per unit above the allowance. In previous studies the optimal three-part tariff contract was characterized using the standard first-order conditions approach. Because this optimization problem is nonsmooth, however, it could only be solved in a few simple cases. In this study we employ a different methodology that is based on obtaining a global bound for the firm profit, and then showing that this bound is attained by the optimal plan. This approach allows us to explicitly calculate the optimal three-part tariff plan under quite general conditions, where consumers are rational, they have a general utility function, they experience psychological costs when they exceed the number of free units, they have deterministic or stochastic consumption rates, they are homogeneous or heterogeneous, and the firm costs are fixed or depend on the usage level.

Item Type: Article
Additional Information: © 2017 INFORMS
Subjects: P > Pricing
Subject Areas: Marketing
DOI: 10.1287/opre.2017.1609
Date Deposited: 20 Jul 2017 12:49
Last Modified: 05 Oct 2017 17:51
URI: http://lbsresearch.london.edu/id/eprint/835

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