You are here

Dissertations

Structural models for nonlinear pricing schemes

Raghuram Iyengar, 2005
Faculty Advisor: Asim Ansari

Abstract

Nonlinear pricing schemes are present in many service industries. However, there is relatively little empirical research that models customers' choices of service options and their consumption decisions in the presence of such nonlinear pricing schemes. In this dissertation, we contribute by structurally modeling the impact of nonlinear pricing schemes employed by services on customers' choice of service options, their consumption patterns and their decision to stay or defect. We focus on the wireless industry.

Within the wireless industry, pricing schemes are typically characterized by an access fee, included free minutes and a per-minute marginal price for any consumption above the free minutes. Such pricing schemes are termed increasing block as the applicable marginal price increases with consumption. While this dissertation focuses on the wireless industry, increasing block schemes are used by other services and the modeling framework of this dissertation can be adapted to these contexts.

In the first part of the dissertation, we develop a structural model that incorporates the nonlinearity of the pricing scheme. This model gives several substantive results on how past consumption dynamics impact current consumer decisions. For instance, past under-utilization of free minutes either increases current consumption or influences customers to downgrade plans. We also use policy experiments to simulate the effects of price changes on plan switching and customer defection and link these changes to Customer Lifetime Value (CLV). We find that changes in access price have an overall greater impact on CLV as compared to that from changes in marginal prices. In addition, changes in access prices have greater impact on the CLV of “light users” while changes in marginal prices have a bigger influence on the long-term value of “heavy users”.

In the second part of the dissertation, we extend the structural model to incorporate consumer learning. In the current context, there can be two forms of consumer uncertainty. First, consumers can be uncertain about the benefits associated with different service options (for instance, customer service) and can learn more about these benefits after choosing a plan. We call this quality learning. Second, consumers can be uncertain about their consumption of minutes and learn about its distribution after observing their monthly usage of minutes. This type of learning is termed as quantity learning. We develop a structural model that incorporates these dual forms of uncertainty within a nonlinear pricing setting.

The results from this model gives insights about the effect of consumers' uncertainty on their consumption decisions. The results show that quantity learning is more important than quality learning. Policy experiments conducted to investigate the effects of changes in price and quality also give several interesting results. We find that “light users” are most sensitive to changes in quality and they respond to a decrease in quality by churning. Further, we find that the negative effects of a price increase can be offset by an increase in quality. Specifically, we estimate that a 3.3% increase in quality can nullify the effects of a 10% increase in access fee.

The insights gleaned from this dissertation will be useful for managers to understand the impact of nonlinear pricing schemes on consumers' decisions, particularly in the context of consumer uncertainty.

Doctoral Program News

Honigsberg featured in Ideas at Work

The August issue of Ideas at Work features research that doctoral candidate Colleen Honigsberg led in conjunction with Sharon Katz.

Read More about Colleen

Wazlawek featured in Ideas at Work

Abbie Wazlawek's joint research with Professor Daniel Ames is featured in the June 24th, 2014 edition of Ideas at Work

Read More about Abbie

Ethan Rouen featured in Ideas at Work

Ethan Rouen's joint research with Professor Dan Amiram is featured in the May 15th, 2014 edition of Ideas at Work

Read More about Abbie

Rivas Wins Fellowship

The PhD program is proud to congratulate Miguel Duro Rivas, who was awarded the Nasdaq Educational Foundation Doctoral Dissertation Fellowship.

Read More about Miguel

Wong wins Deloitte Fellowship

We are proud to announce that Yu Ting (Forester) Wong is one of the recipients of the 2014 Deloitte Foundation Doctoral Fellowship in Accounting.

Read More About Yu Ting >

The PhD Program Congratulates John Yao

PhD student John Yao was a finalist in the 2013 M&SOM (Manufacturing & Service Operations Management) student paper competition.

Read More About John >

Honigsberg Named Postdoctoral Fellow

The PhD program is proud to congratulate Colleen Honigsberg, who was named the Postdoctoral Fellow in Corporate Governance at the Millstein Center at Columbia Law School in October 2013

Read More about Colleen >

 

Application Deadlines

Master of Science in Marketing >

For Fall 2015 Entry:
Deadline: December 15th, 2014

 

Master of Science in Financial Economics

For Fall 2015 Entry:
Deadline: December 15th, 2014

 

Master of Science in Management Science and Engineering

For Fall 2014 Entry:
Early Decision: Jan 6, 2014
Regular Decision: Feb 15, 2014

 

Apply Now
Sept 2015

Doctoral
Deadline: 01/05/15

MS Marketing
Deadline: 01/05/15

MS Financial Economics
Deadline: 01/05/15

MS Leadership
Rolling admission

Check Application Status

Students listening to classroom lecture

Once you've submitted your application, you can login and track your status by using the link below.

Check Status