Product Bundling Under Three-Part Tariffs

Abstract

A strategy used by firms in industries such as wireless is to bundle several services into a service plan and administer a nonlinear price with different marginal prices for different usage levels. Moreover firms offer a menu of service plans targeting different consumer segments to implement second-degree price discrimination. To explore the profit impacts of these service plans we need to understand and predict consumer choices, and towards this goal we develop a structural model of consumers' choice of plans and usage decisions, and estimate the model using a dataset from a wireless service provider. We find that both voice calls and text messages are important drivers of consumer utility. Moreover, consumer preferences for the two services are positively correlated. The current service plans in our data are not optimal, perhaps due to incorrect customer segmentation strategy of the firm. Our pricing experiments based on estimated consumer preferences suggest that the firm should offer one plan targeting heavy users, with a higher access fee and higher free usage for voice calls and text messages, and another plan targeting light users, with a lower access fee and lower free usages, as either a replacement for or in addition to current plans.