Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs

Fabian Herweg ()

No 14/2010, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

Abstract: The so called flat-rate bias is a well documented phenomenon caused by consumers' desire to be insured against fluctuations in their billing amounts. This paper shows that expectation-based loss aversion provides a formal explanation for this bias. We solve for the optimal two-part tariff when contracting with loss-averse consumers who are uncertain about their demand. The optimal tariff is a flat rate if marginal cost of production is low compared to a consumer's degree of loss aversion and if there is enough variation in the consumer's demand. Moreover, if consumers differ with respect to the degree of loss aversion, firms' optimal menu of tariffs typically comprises a flat-rate contract.

Keywords: Consumer Loss Aversion; Flat-Rate Tariffs; Nonlinear Pricing; Uncertain Demand (search for similar items in EconPapers)
JEL-codes: D11 D43 L11 (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs (2013)
Working Paper: Uncertain demand, consumer loss aversion, and flat-rate tariffs (2011)
Working Paper: Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bonedp:142010

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