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Uncertain demand, consumer loss aversion, and flat-rate tariffs

Fabian Herweg () and Konrad Mierendorff

No 12, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: We consider a model of firm pricing and consumer choice, where consumers are loss averse and uncertain about their future demand. Possibly, consumers in our model prefer a flat rate to a measured tariff, even though this choice does not minimize their expected billing amount—a behavior in line with ample empirical evidence. We solve for the profit-maximizing two-part tariff, which is a flat rate if (a) marginal costs are not too high, (b) loss aversion is intense, and (c) there are strong variations in demand. Moreover, we analyze the optimal nonlinear tariff. This tariff has a large flat part when a flat rate is optimal among the class of two-part tariffs.

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: 2011-03
New Economics Papers: this item is included in nep-bec, nep-com, nep-mkt and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://www.zora.uzh.ch/id/eprint/51516/1/econwp012.pdf (application/pdf)

Related works:
Journal Article: UNCERTAIN DEMAND, CONSUMER LOSS AVERSION, AND FLAT‐RATE TARIFFS (2013) Downloads
Working Paper: Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs (2013)
Working Paper: Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs (2010) Downloads
Working Paper: Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs (2010) Downloads
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