Faculty of Economics and Business Administration Publications Database

Optimization and analysis of the profitability of tariff structures with two-part tariffs

Schlereth, Christian
Stepanchuk, Tanja
Volume: 206
Number: 3
Pages: 691 - 701
Month: November
ISSN-Print: 0377-2217
Link External Source: Online Version
Year: 2010
Keywords: Marketing; Pricing; Two-part tariffs; Mixed integer nonlinear programming
Abstract: Service providers often offer tariff structures with several two-part tariffs that consist of a fixed fee and a usage price, such that consumers may pick the tariff they prefer. Prices of tariffs have significant impacts on service providers’ profit, because they simultaneously influence consumers’ tariff choices and their usage. The number of tariffs also plays an important role, because more tariffs segment the market better but also increase the administrative burden and require more marketing effort. This article presents a mixed-integer nonlinear programming optimization problem to determine profit-maximizing tariffs; compares several heuristic search methods, in particular, the gradient method, stochastic search, and simulated annealing, to solve this problem; analyses the profitability of different tariff structures; and outlines the factors that drive differences in profitability across various tariff structures. The results show that especially for large samples of more than 100 consumers, simulated annealing performs best and deviates only 0.2% from the optimum. Structures with fewer two-part tariffs are generally sufficient, because additional two-part tariffs only negligibly increase service providers’ profit.