Screening with Under-Utilization: Tiers, Add-ons, and Multi-Part Tariffs

Abstract

We study a screening model in which agents can under-utilize goods. We characterize implementable and optimal contracts and show that, whenever the principal values usage instrumentally, the optimal menu involves multi-part tariffs with tiers of zero marginal prices. We apply our results to study the pricing of digital goods which naturally feature usage-based revenue and unpunishable under-utilization, such as social media, news, and content streaming. We derive comparative statics that map the structure of usage-based revenues to familiar multi-part pricing schemes (premium plans, free trials, and free products) and study the welfare implications of technological progress in targeted advertising. We show how partial contractibility of usage generates an endogenous separation between users and employees of digital platforms.