Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs

Arbeitspapier

The so called flat-rate bias is a well documented phenomenon caused by consumers' desire to be insured against fluctuations in their billing amounts. This paper shows that expectation-based loss aversion provides a formal explanation for this bias. We solve for the optimal two-part tariff when contracting with loss-averse consumers who are uncertain about their demand. The optimal tariff is a flat rate if marginal cost of production is low compared to a consumer's degree of loss aversion and if there is enough variation in the consumer's demand. Moreover, if consumers differ with respect to the degree of loss aversion, firms' optimal menu of tariffs typically comprises a flat-rate contract.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB/TR 15 Discussion Paper ; No. 330

Classification and Topics

• Classification: Wirtschaft ; Consumer Economics: Theory ; Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection ; Production, Pricing, and Market Structure; Size Distribution of Firms
• Subject: Consumer Loss Aversion ; Flat-Rate Tariffs ; Nonlinear Pricing ; Uncertain Demand ; Preismanagement ; Preisdifferenzierung ; Konsumentenverhalten ; Risikoaversion ; Nachfrage ; Risiko ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Herweg, Fabian
• Event: Veröffentlichung
• (who): Sonderforschungsbereich/Transregio 15 - Governance and the Efficiency of Economic Systems (GESY)
• (where): München
• (when): 2010

Further information

• DOI: doi:10.5282/ubm/epub.13224
• Handle: http://hdl.handle.net/10419/93741
• URN: urn:nbn:de:bvb:19-epub-13224-4
• Last update: 10.03.2025, 11:43 AM CET