Doing More with Less: Price Discrimination with Three-Part vs. Two-Part Tariffs

32 Pages Posted: 24 May 2008

See all articles by Adib Bagh

Adib Bagh

affiliation not provided to SSRN

Hemant K. Bhargava

University of California, Davis

Date Written: August 2008

Abstract

Multi-part tariffs, such as menus of two-part tariffs and three-part tariffs, are widely used in industry, especially for pricing of information goods, online services, telecommunications products, etc. This paper examines the effectiveness of these price structures for price discriminating between heterogeneous customers. We show that a relatively small menu of three-part tariffs (3PTs) can be more profitable and, sometimes, socially more desirable than a larger menu (more items) of two-part tariffs (2PTs). Often, a single three-part tariff can beat a menu of multiple two-part tariffs. Moreover, this 3PT menu has lower hidden costs - it can be designed with less information about consumer preferences, relative to the menu of two-part tariffs. The 3PT structure not only produces higher profit, but has lower managerial and decision complexity.

Keywords: multi-part tariffs, price discrimination, tariff performance, asymmetric information

JEL Classification: L11

Suggested Citation

Bagh, Adib and Bhargava, Hemant K., Doing More with Less: Price Discrimination with Three-Part vs. Two-Part Tariffs (August 2008). UC Davis Graduate School of Management Research Paper No. 03-08, Available at SSRN: https://ssrn.com/abstract=1134387 or http://dx.doi.org/10.2139/ssrn.1134387

Adib Bagh

affiliation not provided to SSRN

Hemant K. Bhargava (Contact Author)

University of California, Davis ( email )

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