Kamel Jedidi

Optimal Multitiered Pricing of Products and Services: A Structural Conjoint Approach

Coauthor(s): Raghuram Iyengar, Rajeev Kohli.

Abstract:

Multi-tiered increasing-block pricing is widely prevalent in many industries such as electricity and water supply, Internet usage and wireless services. In a two-tier pricing scheme, for example, the service provider charges an access fee that includes free units of service and a per-unit price for excess usage. Such pricing structures lead to nonlinear budget sets and create an endogeneity between the applicable per-unit price and consumption — consumption is influenced by the marginal price and the applicable per-unit price, in turn depends on the level of consumption. This endogeneity presents two modeling challenges. The first involves demand estimation and the second lies in the characterization of the impact of a price change.

In this paper, we propose a structural conjoint model of consumer choice for services under two-tiered tariff pricing that addresses both of these challenges. A primary benefit of the proposed approach is its ability to infer consumer expected consumption from choice data while accounting for individual-level heterogeneity. We illustrate the model using data from a conjoint study of wireless services. We compare our results with those from a reduced-form, choice-based conjoint and derive implications for demand estimation and optimal pricing on wireless services.

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