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Tariff-Specific Preferences and Their Influence on Price Sensitivity

Author(s): Agnieszka Wolk | Bernd Skiera

Journal: BuR : Business Research
ISSN 1866-8658

Volume: 3;
Issue: 1;
Start page: 70;
Date: 2010;
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Keywords: flat rate | flat-rate bias | nonlinear pricing | pay-per-use bias | price elasticity | pricing | tariff choice | tariff-specific preferences | three-part tariffs

For many services, consumers can choose among a range of optional tariffs that differ in their access and usage prices. Recent studies indicate that tariff-specific preferences may lead consumers to choose a tariff that does not minimize their expected billing rate. This study analyzes how tariff-specific preferences influence the responsiveness of consumers’ usage and tariff choice to changes in price. We show that consumer heterogeneity in tariff-specific preferences leads to heterogeneity in their sensitivity to price changes. Specifically, consumers with tariff-specific preferences are less sensitive to price increases of their preferred tariff than other consumers. Our results provide an additional reason why firms should offer multiple tariffs rather than a uniform nonlinear pricing plan to extract maximum consumer surplus.
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