Optimal pricing of telephone usage: An econometric implementation

Abstract

The presence of consumption externalities is identified as one of the main characteristics of telecommunications demand. One assumes here that the individual valuations for these externalities are unknown and are the principal source of incomplete information in the relation between a consumer and a telephone service provider. First, a solution towards a proper modeling of consumption externalities of telephone in a utility function is offered. Second, the parameters of this utility function are estimated by fitting the demand for usage to a sample of French residential call users. Third, assuming that the operator maximizes welfare under a budget constraint, we show that the optimal two-part tariff performs an income redistribution and internalizes the network externality. Fourth, we solve the problem of second-degree price discrimination among customers having different valuations for the service sold by the firm. Given the distribution of individual valuations obtained in the first step of our analysis, we are able to compute the payment schedule that is solution to this problem. Hence there is a way to implement incentive pricing policy from observed data of telephone usage.