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Overage Disutility, User Trading, and Tariff Design

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  • Weixiang Huang
  • Yanzhi Li
  • Youhua Chen

Abstract

Popular tariffs in the telecommunications market, such as three‐part tariffs and flat‐rate plans, specify an allowance below which customers enjoy a free and high‐quality service. When they consume beyond the allowance, customers either need to pay for the overage (under three‐part tariffs) or receive a degraded service (under flat‐rate plans), thus experiencing an overage disutility. Some network service providers have recently begun to allow data trading among their subscribers, who can now sell their allowances or buy up to meet their needs. We study whether and how allowing user trading can enhance a service provider's profitability. Considering a monopolistic firm, we find that allowing trading among users improves system‐wide consumption efficiency and reduces overage disutility at the expense of losing overage revenue. Overall, trading can be beneficial to the firm. Particularly, the profitability of the firm is critically driven by addressing customers’ overage disutility. Moreover, allowing trading always improves social welfare and can also improve consumer surplus. Finally, on a self‐operated platform, the firm may find it not profitable to charge a transaction fee but will regulate up the trading price.

Suggested Citation

  • Weixiang Huang & Yanzhi Li & Youhua Chen, 2021. "Overage Disutility, User Trading, and Tariff Design," Production and Operations Management, Production and Operations Management Society, vol. 30(10), pages 3758-3783, October.
    • Handle: RePEc:bla:popmgt:v:30:y:2021:i:10:p:3758-3783
    DOI: 10.1111/poms.13480
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