Post date: Nov 23, 2016 6:01:06 PM
Hemant K. Bhargava and Manish Gangwar
Many sellers of multi-unit consumption goods, especially technology entrepreneurs, grapple with using access (or subscription) fees and per-unit usage fees. This paper relates the choice to a new metric of consumer heterogeneity, RVSL: relative variation in satiation levels relative to the variation in first unit valuation. Per-unit pricing is superior to flat-rate subscription pricing when the firm is uncertain about RVSL or wants the same pricing structure across multiple products. A two-part tariff (with both access and use fees) is consequential only when RVSL is moderate. Per-unit pricing works quite well when RVSL is high, while flat-fee pricing does well when RVSL is low. An alternative way to combine both fee instruments is to let consumers choose between a flat-rate or access fee. This self-selecting menu is superior to a two-part tariff in terms of overall profitability and market share across a range of RVSL scenarios.