Do three-part tariffs improve efficiency in residential broadband networks?

Abstract

We analyze subscriber usage data from an Internet Service Provider that sells service using three-part tariff and unlimited plans. Subscribers facing three-part tariffs have lower average usage than subscribers on unlimited plans, and differences among heavy users explain nearly all the overall difference. Hence, the three-part tariff saves network costs and narrows the gap, between light and heavy users, in price per Gigabyte used. However, subscribers facing three-part tariffs cut usage similarly during peak and off-peak hours. Since off-peak usage adds no network costs, these off-peak usage reductions lower welfare. Differentially pricing peak usage could further enhance efficiency.