Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans

In this paper, I study the theoretical and econometric implications of agents' uncertainty concerning their future consumption when a monopolist offers them either a unique, mandatory nonlinear tariff or a choice in advance from a menu of optional two–part tariffs. Agents' uncertainty is resolved through individual and privately known shocks to their types. In such a situation the principal may screen agents according to their ex ante or ex post type, by offering either a menu of optional tariffs or a standard nonlinear schedule. The theoretical implications of the model are used to evaluate a tariff experiment run by South Central Bell in two cities in Kentucky in 1986. The empirical approach explicitly accounts for the existence of informational asymmetries between local telephone users and the monopolist, leading to different, nested, econometric specifications under symmetric and asymmetric information. The empirical evidence suggests that there exists a significant asymmetry of information between consumers and the monopolist under both tariff regimes. All expected welfare components failed to increase with the introduction of optional tariffs for the estimated value of the parameters.     

Ex post vs. ex ante pricing: Optional calling plans and tapered tariffs

We study optimal nonuniform pricing in a setting where a customer's demand at the start of a billing period contains a random variable whose realization becomes known by the end of the billing period. In this context, an optional calling plan is a tariff which the consumer must select based on his/her expectations about the random variable, whereas, under a tapered tariff, the consumer's choice of usage charge is made after he/she knows the realization of the random variable. We show that for low to moderate levels of uncertainty about the random variable entering the demand function, the optional calling plan approach to nonuniform pricing yields higher expected profit than does the tapered tariff approach, given risk-neutral consumers. We illustrate this finding with a case study and argue that it is consistent with the historical evolution of tariffs in the interexchange telecommunications market.     

Welfare-optimal pricing and capacity selection under an ex ante maximum demand charge

This paper deals with the simultaneous determination of welfare-optimal pricing and investment rules under a multi-period ex ante maximum demand charge by allowing the possibility of purchasing electricity from third party generators at some cost when excess demand occurs. I show that at the optimal size of capacity, expected short-run marginal shortage cost and long-run marginal capacity cost should be equal. The optimal maximum demand tariff does not entail marginal cost pricing. In general, it is shown that maximum demand charges are welfare superior to marginal cost pricing when tariffs must be set ex ante, before demand is known.     

One size may not fit all: Welfare benefits and cost reductions with optional differentiated household electricity rates

We consider optional time-of-use (TOU) pricing for residential consumers, offered by a publicly regulated electricity supplier, as an alternative to a single TOU or flat rate structure. An equilibrium model explores and quantifies the effects of such pricing on welfare, consumption, and production costs. The supplier offers to each household a menu of possible rate structures obtained by maximizing a collective welfare function subject to three restrictions: Pareto efficiency, incentive compatibility, sufficiency of supplier revenue to cover costs. Simulations based on realistic calibration of the model demonstrate that optional pricing can increase overall consumer welfare and reduce average cost.     

非线性定价的福利再分配效应研究——基于非对称双寡头市场的分析

较之"线性定价","非线性定价"在社会福利方面的优势被现有理论反复证明。在肯定"非线性定价"方式能够改进社会总福利的同时,指出并不是每一个市场主体的福利水平都能够通过"非线性定价"方式得到改进。通过建立模型、计算和比较分析,提出了在上述两种情况下,"非线性定价"可能会对特定的市场主体产生"福利剥夺",从而出现福利再分配效应。     

Relaxing competition through quality differentiation and price discrimination

In this paper, I compare two-part tariff competition to linear pricing in a vertically differentiated duopoly. Consumers have identical tastes for quality but differ in their preferences for quantity. The main finding is that quality differentiation occurs in equilibrium if and only if two-part tariffs are feasible. Furthermore, two-part tariff competition encourages entry, which in turn increases welfare. Nevertheless, two-part tariff competition decreases consumer surplus compared to linear pricing.     

Multiproduct tariffs

Necessary conditions characterizing optimal nonlinear multiproduct tariffs are derived from aggregate data about customers' responses to linear tariffs. These conditions are amenable to numerical solution with standard software by using a discrete formulation of an associated nonlinear optimization problem cast in terms of the marginal prices charged for incremental bundles. This approach avoids integrability restrictions that otherwise encumber the computations. However, this method does not ensure that customers' second-order conditions for optimality of their demands are satisfied. Some numerical examples are provided, and the extension of the method to Ramsey pricing is also demonstrated.     

Pricing of Transport Networks,Redistribution, and Optimal Taxation

The author studies optimal pricing of roads and public transport in the presence of nonlinear income taxation. Individuals are heterogeneous in unobservable earning ability. Optimal transport tariffs depend on time costs of travel and work schedule adjustments (days and hours worked per day) as a response to commuting costs. The author finds that discounts for low‐income individuals are optimal only if the time cost of a trip is small enough. Lower travel time costs facilitate screening; therefore, redistribution provides an additional motive for congestion pricing. Finally, the study investigates the desirability of means‐testing of transport tariffs.     

Screening consumers through alternative pricing mechanisms

This paper addresses the optimal design of optional nonlinear tariffs. Two particular solutions commonly used in telecommunications and other industries are fully characterized. These optimal outlay schedules illustrate how the tariff design is altered when there exists a time lag between tariff choice and consumption. In this model, consumers' uncertainty is resolved in the interim, between the tariff choice and the usage decision, through changes in their types. The paper studies whether the monopolist may profit from screening consumers according to different information sets, and it shows that expected profits are higher under an ex-post tariff if the variance of the ex-ante type distribution is large enough. The paper also shows that no results regarding social efficiency may be obtained in general. Welfare comparison of optional tariffs will be very sensitive to type distributions, how types enter demand specifications, and the relative variance of the type components.I wish to thank John Panzar for his guidance on the present research and, for his many suggestions over several endless discussions on this paper. I also thank Kyle Bagwell, Robert Porter, and Daniel Spulber for helpful comments and suggestions. Financial support from the Ministerio de Educación y Ciencia, Spain, is gratefully acknowledged.     

Microeconometric Analysis of Residential Water Demand

This paper develops a structural model for obtaining price elasticities and evaluating consumer’s response to changes in nonlinear tariffs when only panel data on household consumption are available. The model and the empirical strategy address problems implied by nonlinear tariffs, existence of a fixed cost, and use of limited data, giving rise to a random effects model with a nonlinear individual effect. Results show that the estimated model does well at fitting data and demand is inelastic, although elasticity varies by initial consumption block. Then, I estimate welfare consequences of implementing several demand policies.     

A Model of Shareholder Discounts

Many companies supplying consumption goods and services provide their shareholders with price discounts. This paper presents a simple model describing shareholder discounts and consequent market equilibrium. It is found that shareholder discounts resemble many features of two-part tariffs. The welfare analysis shows that the equilibrium outcomes with shareholder discounts are Pareto inefficient. Compared with uniform pricing, shareholder discounts unambiguously increase major shareholders' wealth but their effects on consumers and society are generally ambiguous.     

Efficiency and Equity in Natural Resources Pricing: A Proposal for Urban Water Distribution Service

This paper focuses on the design of optimal prices for urban water distribution service. In this context, pricing should be aimed at achieving efficiency, equity, financial aspects, and/or public acceptability and transparency. The proposed tariffs are based on the theoretical frameworks suggested by Ramsey (1927) and Feldstein (1972). As a prior step, estimations of urban water demands and water costs are carried out for the Spanish municipality of Seville. Finally, an empirical comparison, in welfare terms, is conducted between the proposed tariffs and those applicable in the year 2000.     

Competitive nonlinear tariffs

This paper generalizes the study of nonlinear tariffs, i.e., those depending nonlinearly on the quantity purchased, to the case of a symmetric oligopoly. Competitive equilibria and the corresponding tariffs are analyzed in a Cournot framework. Various equilibria are obtained, which depend both upon the number of competing suppliers and the choice of market parameters used to characterize the competitors' strategies. Buyers are classified by type, each selecting an optimal consumption level in response to the prevailing tariff. The phenomena of buyer self-selection found in monopoly nonlinear pricing and the scaling of equilibrium demand elasticity found in Cournot models both appear in the results.     

Price Caps,Rate of Return Constraints and Universal Service Obligations

This paper evaluates the effects of modifying price cap regulation when firms are allowed to use non-linear tariffs. We consider a stylized network industry and analyze price cap regulation combined with rate of return regulation and with a universal service obligation. While both modifications can increase aggregate welfare by reducing the pricing distortions under price cap regulation, a universal service obligation is welfare superior if the firms profits and the size of its network are held constant.     

Dynamic pricing of electricity in the mid-Atlantic region: econometric results from the Baltimore gas and electric company experiment

The Baltimore Gas and Electric Company (BGE) undertook a dynamic pricing experiment to test customer price responsiveness to different dynamic pricing options. The pilot ran during the summers of 2008 and 2009 and was called the Smart Energy Pricing (SEP) Pilot. In 2008, it tested two types of dynamic pricing tariffs: critical peak pricing (CPP) and peak time rebate (PTR) tariffs. About a thousand customers were randomly placed on these tariffs and some of them were paired with one of two enabling technologies, a device known as the Energy Orb and a switch for cycling central air conditioners. The usage of a randomly chosen control group of customers was also monitored during the same time period. In 2009, BGE repeated the pilot program with the same customers who participated in the 2008 pilot, but this time it only tested the PTR tariff. In this paper, we estimate a constant elasticity of substitution (CES) model on the SEP pilot’s hourly consumption, pricing and weather data. We derive substitution and daily price elasticities and predictive equations for estimating the magnitude of demand response under a variety of dynamic prices. We also test for the persistence of impacts across the two summers. In addition, we report average peak demand reduction for each of the treatment cells in the SEP pilot and compare the findings with those reported from earlier pilots. These results show conclusively that it is possible to incentivize customers to reduce their peak period loads using price signals. More importantly, these reductions do not wear off when the pricing plans are implemented over two consecutive summers. Our analyses reveal that SEP participants reduced their peak usages in the range of 18 to 33% in the first summer of the SEP pilot and continued these reductions in the second summer.     

Self-selecting tariffs under pure preferences among tariffs

The behavioral assumptions for welfare analysis of self-selecting tariffs are generalized to be consistent with those maintained in empirical models of tariff choice. When customers have pure preferences among tariffs, it is shown that the optimal self-selecting tariffs provide strictly greater welfare than mandatory marginal cost prices, contain marginal prices that do not equal marginal cost, and can Pareto dominate an existing tariff. As an illustration of the theoretical results, optimal self-selecting tariffs are calculated empirically for a local telephone company.     

A welfare analysis of tariffs and equivalent quotas under demand uncertainty: Implications for tariffication

Under market demand uncertainty, we show that quotas can result in a welfare advantage over tariffs for an importing country despite that its government does not capture any quota rents. Specifically, the conditions under which an equivalent quota yields higher expected welfare than a tariff are shown to depend on a set of economic variables. These variables include the initial tariff rate, the relative efficiency in production between home and foreign firms, the probability distribution of random demand shocks that make the quota binding or non-binding under uncertainty, as well as the variance of the stochastic market demand. The analysis of this paper has welfare implications for tariffication.     

Calculating the welfare costs of import restrictions in the imperfect substitutes model

This paper supplies equations for partial-equilibrium calculations of the welfare effects of tariffs and quotas when the imported good and the competing domestic good are imperfect substitutes in demand. The equations take into account the response of the price of the domestic substitute. Although other studies have acknowledged this response, they have failed to account for it in their welfare calculations. To demonstrate the importance of this response, it is shown how it affects the calculations for the welfare costs of tariffs and quotas on US imports of footwear. It is shown that ignoring the response of domestic prices leads to significant overstatement of the welfare costs of tariffs and significant understatement of the welfare costs of quotas for the industry.     

Price discrimination of digital content

This paper considers the simplest DRM, which permits either free or no copying, with incomplete information about the type of consumer. We first obtain results concerning separability of consumers in a general situation, and show that there is a critical type of consumer. A higher utility type selects a menu of free copying whereas a lower one chooses not to copy. In a two-type model we indicate that optimal pricing for a producer is different from that under two-part tariffs. This price strategy brings about greater profits and social welfare if, and only if, self-production is more efficient than that of a producer.     

An Incentive Water Pricing Policy for Sustainable Water Use

By adopting the Water Framework Directive (WFD), the European Commission (EC) and the European Council made recommendations for water pricing policies in European Union (EU) member states with a view to enhancing the sustainability of water resources. Clearly, the directive integrates economic instruments in environmental policies to provide incentives for the sustainable use of water resources. Our analysis will focus on public water utilities, required to be financially self-sufficient, facing demand and capacity shocks. The paper deals with the simultaneous determination of incentive pricing policies and investment rules under an ex~ante maximum demand charge. We will characterize the welfare-optimal capacity selection rule and the welfare-optimal maximum demand pricing rule. Heterogeneous consumers demands are considered when tariffs are set ex~ante, before demands are known. Our results are state-contingent nonlinear pricing that responds to demand fluctuations and capacity constraints.