Estimating the Demand for Service Bundles under Three-Part Tariffs

© 2020 The Editorial Board of The Journal of Industrial Economics and John Wiley & Sons Ltd Consumers may face demand uncertainty when choosing a service plan under three-part tariffs, and preferences for multiple services may be inter-dependent. To examine such a demand system, we construct a two-stage discrete/continuous choice model for service bundles, allowing for interactive utility and preference correlations. Implementing a piecewise maximization approach to consumers’ non-differentiable utility maximization problem, we estimate the model via simulated method of moments. We empirically illustrate the model using data from a Chinese wireless service provider. Our counterfactual analysis shows that the three-part tariffs with interchangeable units show no significant loss of revenue, compared to existing tariffs.