Selling Service Plans to Differentially Informed Customers

This paper characterizes a firm’s optimal offer of service plans in a monopoly market. In this market only informed customers know already at the contracting stage whether their demand is high or low, while uninformed customers may learn their demand only after incurring some costs, if at all. While informed customers purchase simpler tariffs, those who are still uninformed purchase tariffs that subsequently allow them to more flexibly adjust their consumed quantity of the service. The presence of uninformed costumers makes it more costly for the firm, in terms of rent left to consumers, to offer the most basic package, which is purchased by informed low-demand customers. Consequently, the firm makes this package relatively unattractive, resulting in a very low quantity of the consumed service. We find that uninformed customers benefit from the presence of informed customers, even though information only helps to predict a customer’s own demand. However, welfare may be lower if there are more informed customers or if acquiring information already at the contracting stage becomes less costly for uninformed customers. Also, already informed customers may suffer from the presence of additional informed customers.

Inderst, Roman and Martin Peitz (2008), Selling Service Plans to Differentially Informed Customers, ZEW Discussion Paper No. 08-125, Mannheim.