In Chapter 5 we observed that suitably designed optional two-part tariffs are equivalent to nonlinear tariffs when both consumers and the supplier have full information and there are no transaction costs of changing tariffs. In fact, despite additional transactions costs, optional tariffs are in growing use in US telecommunications. In this chapter we examine the theory of optional multipart tariffs in greater detail, review an experiment with optional rate structures, and describe the optional calling plans that have been introduced in national markets.

Theory of optional tariffs reconsidered

Optional two-part tariffs

When consumers face a choice among optional tariffs Train, Ben-Akiva, and Atherton (1989) suggest that many of them do not correctly anticipate their individual demands. That is, viewed ex post, consumers have made choices under optional tariffs that do not minimize their expenditures for the quantities purchased. This means that some consumers are actually worse off under optional tariffs than under the “equivalent” nonlinear tariffs. The question is whether the supplying firm is better off and, if so, by how much? Clearly, at the “incorrect” consumption levels chosen by these consumers the supplier is better off because he receives higher revenues for a given output. However, when consumers choose the “incorrect” optional tariff they also change their consumption levels and thus the firm's costs. In which direction does this effect go?

Assume that the two tariff choices are a linear tariff (po) and a twopart tariff (E,p1), and that in offering the two-part tariff the supplier assumed that consumer demand curves do not cross. If this assumption is justified (as suggested by Train, Ben-Akiva, and Atherton), then larger anticipated purchases will go along with lower marginal prices.