DP6279 Competing with Menus of Tariff Options

Author(s): Eugenio J Miravete
Publication Date: May 2007
Keyword(s): Bivariate Count Data Regression, Nonlinear Pricing Competition, Strategic Complementarity, Tariff Menus
JEL(s): C35, D43, M21
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=6279

I study how firms actually compete in nonlinear tariffs by analyzing whether the incumbent and entrant's decisions to offer a given number of tariff options are interrelated. The goal is to shed some light on those dynamic and strategic aspects of tariff menus that are currently ignored by theoretical models of nonlinear pricing competition in order to highlight some basic features of the market that future theoretical work should address. This paper also introduces a generalized multivariate count data model that allows me to account for the possibility of correlation of any sign among the pricing decisions of competing firms in a manner that is robust to the existence of over and underdispersion of counts. Pricing strategies appear to be strategic complements that respond positively to the existing heterogeneity of consumers' tastes. While this is a common source driving the number of tariff options offered, results also show that previous pricing decisions by the incumbent affect the entrant's current offering of tariff options, thus implying free riding by the entrant on information about the market revealed by the likely better informed firm of the industry. The strategic complementarity result disappears when I only consider non-dominated tariffs.