Flat Rate and Mobile Internet: Customers' Choice from

Complex Sets of Taris

Mrton Varga

October 29, 2014

Preliminary version, please do not cite!

Abstract
I augment the discrete/continuous choice model of Ascarza, Lambrecht and Vilcassim (Journal
of Marketing Research 2012) so that it could be used to analyze customers' decisions when facing
a wide range of mobile-phone taris including several add-on features. By doing so, it becomes
ready to estimate customers' tari choice and usage elasticities to - among others - mobile Internet
allowance, download speed and at rate tari scheme. It is now also able to accommodate tarispecic, time-varying switching fees and to be used to design an ecient marketing campaign. The
model is empirically calibrated for the current tari-structure of T-Mobile Hungary. Managerial
implications are given by elaborating on the power of simulation methods to increase company's
revenue.

1 Introduction
The mobile telephony industry has been steadily growing for decades, triggering tough competition
among the providers (Koski and Kretschmer 2005; Lee et al. 2006). Concurrently, the recent breakthroughs in the mobile Internet technology resulted in an exponential increase of demand for the
service (Kim et al. 2007; Harno 2010), which is thought to be still far from its potential (Funk 2009).
According to GSMA, the European mobile operators' share of revenue from data services (in contrast
to voice and texting) rose from 1% to 12% between 2000 and 2010 (GSMA et al. 2011). Success on
the market heavily depends on the ability of providers to keep and attract customers. Oering attractive tari plans is one, if not the most important element of telecommunication companies' marketing
strategy. Consequently, providers have developed and experimented with a wide range of taris, most
of them priced non-linearly with the usage.
The extent of the mobile telephony industry together with the rising phenomenon of mobile Internet
and its pricing schemes make the behavior of mobile users an intriguing research topic. However, little
attention has been paid in the academic literature to customers' choices from taris that - besides voice
call price - vary in Internet allowance and quality. Equally surprisingly, only one study (Ascarza et al.
INSEAD, Department of Economics. email: marton.varga@insead.edu

2013) investigates revealed mobile usage behavior under the more and more popular at rate plan,
which oers unlimited calls for a xed access price. This study aims to ll the gap in the literature by
analyzing customers' behavior when they have the option to select from a wide range of mobile taris
that may include Internet access and/or unlimited calls.
The mobile telephony industry is not the only one that operates with non-linear pricing. Nowadays,
it is a common feature of the xed-line telephony (Miravete 2002; Narayan et al. 2007) and Internet
provision (Lambrecht and Skiera 2006; Lambrecht et al.

2007) industries, but even users of the

local gym (Della Vigna and Malmendier 2006) or subscribers of a music download plan (Schlereth
and Skiera 2012) encounter non-linear prices.

Eventually, such pricing could be applied in several

contractual settings (Ascarza and Hardie 2013). Still, studies that explicitly focus on pricing schemes
in the mobile telephony industry are relatively rare yet, though the literature on this eld is growing
(Iyengar et al. 2008; Natter et al. 2008; Schlereth et al. 2010; Iyengar et al. 2011; Ascarza et al. 2012;
Kramer and Wiewiorra 2012; Ascarza et al 2014).
In a seminal study, Lambrecht and Skiera (2006) investigated the causes of the at rate bias (i.e.
when users prefer a at rate even though their bill would be lower with a pay-per-use tari ) among
Internet users. They classify the causes as insurance-eect, taxi-meter eect,  convenience eect
and overestimation eect.

Kramer and Wiewiorra (2012) recently added the exibility eect to

the list, which on the other hand discourages users from signing-up for a at rate plan. In another
study, Lambrecht et al. (2007) developed a discrete/continuous model of choice and estimated it on
Internet usage. They found that demand uncertainty increases provider revenue and allowance plays
a key role in consumer tari choice. The authors also derived implication for pricing with three-part
taris. (Three-part taris constitute of an access fee, an allowance, and pay-per use pricing after the
allowance is exceeded. The allowance of two-part taris is set to zero, whereas at rate plans have
innite allowance.)
Miravete (2002) was the rst who studied consumer's behavior under at rate, xed-phone tari
scheme.

Using the 1986 Kentucky local telephone tari experiment, he found that customers learn

after making an initial mistake in tari choice and switch plan accordingly. Using the same dataset,
Narayan et al. (2007) found that consumers learn about their usage rapidly on the pay-per-use plan,
but slowly on the at rate plan.
In another study, Iyengar et al. (2011) used a eld experiment to analyze consumer choice when a
set of pay-per-use and two-part mobile plans are oered. Empirical evidence on cell-phone subscription
behavior under three-part tari is provided by Ascarza et al. (2012). The authors augmented the Lambrecht et al. (2007) model by incorporating that consumers update their belief about their usage and
are able to take advantage of observed subscription data. Even though their model is comprehensive,
it still does not incorporate several features of the real-world tari oerings. Therefore, it may not be
applicable in many cases in its current form.
There are various features of mobile-phone subscription plans that may signicantly inuence customer choice and usage, but have not been studied in a structural form. Iyengar et al. (2008) were
the only ones who considered mobile Internet access as a meaningful element of a plan. The authors
developed a discrete/continuous choice model to investigate customer's preferences towards cell-phone
taris with add-on features. In an experimental setting, they found that their proposed model out-

performs standard conjoint models. However, they did not use subscription data but an experiment
in which students chose from a few taris. The choice was made once, consequently no adjustment
or learning was incorporated. Furthermore, Internet access was added as a dummy variable, thus the
potential heterogeneity of included allowance and download speed was not addressed either.
Earlier studies found that consumer's valuation of services may depend on the plan they are currently subscribed to. Ascarza et al. (2012) showed that people value the three-part tari scheme more
than other schemes. Other studies investigated preferences about at rate schemes among xed-phone
(Miravete 2002; Narayan et al. 2007) or Internet subscribers (Lambrecht and Skiera 2006; Lambrecht
et al. 2007). Still, there is no revealed-preference empirical study on how at rate valuation is compared to other tari types yet. Only Kramer and Wiewiorra (2012) showed the results of a survey,
which asked respondents to compare at rate plans with a new plan introduced by a German provider.
Furthermore, studies generally do not take into account that the provider can dierentiate between
customers by providing special oers and discounts to certain groups. In practice, this can be embodied
in a VIP status, which may provide additional benets to the customer. Also, corporate mobile-service
users have never been analyzed in the literature, even though their choice and usage behavior may
signicantly dier from individual users' usage patterns (Aribarg et al. 2010), thereby providing an
intriguing topic to research on.
Existing works also failed to address the dierence between pre-paid and contractual setting, the
heterogeneous potential of tari schemes in attracting new customers, and that customers may purchase
appliance and subscription jointly.

Marketing models of telecommunication have also ignored the

existence of loyalty contracts (either on the subscription or on a certain plan), even though loyalty
programs are gaining strategic importance in a wide range of industries including mobile telephony
(Bruegelmans et al.

2014).

Besides these, all of the studies assumed the absence of tari-specic

marketing campaigns, which may not be realistic. In addition, to the best of my knowledge there is
only one paper that derives advice about how to increase prot by including or excluding certain plans
from the oered list. However, Schlereth et al. (2010) explicitly state that their study is a non-linear
optimizing exercise and not a structural marketing model aiming to estimate demand.
This paper addresses several elements of mobile-phone taris that previous studies have ignored.
Building on the Ascarza et al. (2012) study, I use a structural discrete/continuous model to investigate
consumer behavior when several taris - including pay-per-use, two-part, three-part and at rate - are
oered and when mobile Internet allowance is a key feature of the tari structure.
I also elaborate on how the current state-of-the-art modeling could be further improved.

For

instance, Gerpott et al. (2013) showed that mobile Internet usage heavily depends on the appliance
used. Therefore, one of the logical extensions of structural modeling could be to allow usage behavior
to be a function of the device used.
For the empirical part of the paper, I plan to collaborate with the largest mobile service provider of
Hungary, and obtain data about the plan choice and usage of subscribers from a period that (ideally)
includes several months before and after the 2013 introduction of a at rate plan into a wide range of
other available taris. This recent form of the paper will serve as a proof of readiness when I will meet
the marketing managers of T-Mobile.
The remaining part of the paper is structured as follows. In Section 2, I introduce the current tari

structure of T-Mobile. Section 3 describes the structural model. Section 4 elaborates on the potential
of simulation techniques. Section 5 provides a summary and directions for future research.

2 The T-Mobile tari structure

T-Mobile is the largest mobile network operator on the Hungarian market: in 2013, 46% of the active

1 Its rivals are Telenor and Vodafone with market

mobile phone users were subscribers of the company.

shares of 31.5% and 22.5%, respectively. T-Mobile is also the most experienced provider in the market
as it was the rst entrant more than 20 years ago. All of the operators serve individual and corporate
clients, have roughly equal network quality and coverage, sell mobile appliances as well, and provide
pre-paid and contractual SIM cards (the latter usually come with a 12/24-month loyalty contract).
Table 1 shows the taris and their characteristics that were oered by T-Mobile to individual
(i.e.

2 Corporate customers had entirely

non-corporate) users not having VIP status in May 2014.

dierent tari structure, while VIP customers enjoyed signicant discounts on access fees and prices
and other convenience services, thus they are not directly comparable to regular individual customers.
Taris that are only available to a specic group of clients (e.g. university students or home television
subscribers) are not shown. At the beginning of 2013, at rate taris were not available.

Customers can choose from 16 contractual and 4 pre-paid taris. Contractual plans include at rate
and three-part taris, while pre-paid plans are either two-part or pay-per-use. Certain pre-paid taris
include xed cost, which is automatically deducted at the beginning of the billing period (month).
In the contractual setting, there is an access price, which is dierent from the xed cost in the sense

that it can be entirely spent on voice and texting services.

Both xed cost and access price are

automatically added to the bill regardless of usage. Whenever the price of the usage exceeds the access
price, this extra cost of usage (depending on voice/text destination) is billed in addition to the access
price. None of the contractual plans includes roll-over. Users who had not signed a loyalty contact on
their chosen tari are free to switch plan once a month.

5 Users under a loyalty contract on their tari

face a signicant (usually too high to be economic) switching cost charged by the provider.
Taris not only vary in access price (which directly denes the call/text allowance) and marginal
price but in several other characteristics. Importantly, they dier in mobile Internet allowance and
download speed. A few oer fast-speed Internet, while two pre-paid plans not even enable the user to
surf online. There are also various add-on features including:

Internet allowance when abroad.

Non-stop technical assistance.

1 http://www.mobilport.hu/hirek/20130912/hogy_all_a_t_a_telenor_es_a_vodafone_harca/
2 The company oers two types of VIP awards to its customers (arany (gold) and platina (platinum)

cards) based

on their usage history (e.g. time spent at the provider and sum of all paid bills).

3 The

company also stopped oering some other earlier taris; users of those plans can stay with their plan but one

cannot newly subscribe or switch to a removed plan.

4 The

access price can also be spent on MMS, but given the very modest share of this service in the analysis I assume

that users do not use it. As a consequence, texting refers to SMS sending in the rest of the paper. This assumptions
may be relaxed if needed.

5 Some

minor restrictions may apply.

5
19
39

Hang & adat

Sms & adat

Hello

holnap

(pre-paid)

Domino

Domino

Aktv

21

XXL

67/47

33/21

49

29

23

XL

28

Surf

30

Mozaik

33

96

43/33

49

39

39

29

24

26

31

33

35

39

41

40

38

35

38

40

96

33/21

49

39

39

29

24

26

31

33

35

39

41

40

38

35

38

40

(landline)

Call price

39

36

49

29

39

19

24

26

31

33

35

38

36

37

32

33

36

38

network)

(within

SMS price

47

36

49

39

39

29

24

26

31

33

35

38

41

40

38

35

38

40

network)

(out of

SMS price

no

no

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

option

Internet

Standard features

150

1000

1000

3000

2000

1000

750

500

200

50

50

500

200

30

3000

7.2

7.2

7.2

7.2

60

60

60

7.2

7.2

7.2

7.2

7.2

7.2

7.2

7.2

7.2

60

60

(Mbit/s)

(Mbyte)
500

Download
speed

Internet
allowance

560

890

cost

xed

3290

3290

20890

16890

11890

8600

5400

3200

3290

1950

2290

5490

3490

1990

29990

13990

price

Access

50

(Mbyte)

Internet
abroad

no

no

no

no

no

no

no

no

no

no

no

no

no

no

no

no

no

no

yes

no

assistance

Technical

no

no

no

no

no

no

no

no

no

no

no

no

no

no

no

no

yes

no

Internet
allowance
sharing

no

no

no

no

no

no

no

no

no

no

no

no

no

no

yes

no

no

no

no

no

e
0

(w. network)

Numbers called
for free

Add-on features
Entertainment
card

no

no

no

no

yes

no

no

no

no

no

no

no

no

no

no

no

no

no

1000 within
network
SMS

50

20

10

multiplier

Mozaik

4000

penalty

-7000

-1000

(1 year)

Tari
loyalty

Tari
loyalty

-10000

-3000

(2 years)

Loyalty pricing
Without
appliance

Note: Tari structure in May 2014. Values are in HUF (100 HUF = 0.44 USD approx.). Both for new and existing customers. All plans come with a mandatory (at least) 1 year service contract. Users can
switch plan once a month. Pre-payed users who switch to a three-part or at-rate tari and sign a 2-year loyalty contract receive a monthly 500 HUF discount for 2 years. If pre-paid and balance is 0, user
can receive calls and messages up to a certain period.
a: extra call access can be bought for 500 HUF (no roll-over)
b: 10 MByte beyond-allowance Internet can be bought for 195 HUF. The daily rst 10MByte is automatically charged when usage starts. The second 10MByte can be requested by the user.
c: peak time/other time
d: up to 100 hours
e: also SMS
f: One of the followings is free, any other one can be ordered for 350 HUF: 30 free within network text messages, 10 free domestic messages,10 free MMS, one number to call at half-price, out of network calls
for within network price, sport info service. The multiplier respectively multiplies these numbers.

Pay-per-use

Two-part

Pay-per-use

Two-part

Three-part

36

37

32

35

Surf

XS

33

36

0
38

network)

network)

XS

(out of

Call price

(within

Call price

XL

Subfamily

XS

Eco

Fun

Move

Next

Flat rate

Tari

Family

Typology

Table 1: T-Mobile tari structure

Possibility to share Internet allowance between more appliances, for which purpose an extra SIM
card is given.

An entertainment card that provides discount in certain cinemas, stores, etc.

A limited number of within network cell-phone numbers the user can call (or even text) for
half-price or for free.

Certain amount of free within network text messages.

Equal within network and out of network rates.

Furthermore, the monthly access price of the at rate taris could be lower provided the user signs a
1 or 2-year loyalty contract on the tari. Flat rate access price may also be inuenced by whether an
appliance is jointly bought with the subscription.
Clearly, customers can choose from a wide range of plans with a batch of add-on features. This
extensiveness of the tari structure and the growing importance of mobile Internet access and usage
justify the need of having a marketing model that is able to capture the complexity of the decision
customers face when choosing a mobile plan.
Since the customer can call and send SMS to both within and out of network numbers, I dene the
term

composite minute usage,

which is a weighted average of within network/landline/other network

calls and within network/out of network text messages. More precisely, I assume that the customer
calls and sends messages to 10 numbers in each destination group. The relative frequency of calling (or
texting) a number in a given destination group takes integer values between 1 and 10. For instance,
the customer spends 10 times more time calling her favorite within network number than her least
favorite within network number. I further assume that the 3 destination groups have equal total call
duration and that as many SMS are sent to within network numbers as out of network numbers. Note
that these assumptions could be adjusted to match the observed numbers upon having access to data.
Given that the average number of monthly text messages was 27.5 and that the average duration of
monthly outgoing calls was 144 minutes in 2011 in Europe (GSMA et al. 2011), I set the ratio of total
messages to total calls equal to 0.19. The last assumption needed to identify the characteristics of a
composite minute usage is that customers call and text with equal total duration and frequency across

6 Thus, roughly, 5 minute composite usage

peak and other times (only relevant for pre-paid taris).

can be interpreted as the sum of a 5-minute long call and one SMS.
Figure 1 shows how customers' bill varies according to their usage under some selected taris. In
order to visually illustrate the heterogeneity of Internet allowance and speed across taris, I let the
thickness of the lines be proportional to the Internet allowance and the dash types vary over download
speed. The Next family includes only at rate taris; the Move, the Eco, the Mozaik and the
Hello holnap schemes are three-part taris; the Domino Surf  is a (pre-paid) two-part tari and the
Domino is the classical (pre-paid) pay-per-use tari. Just by looking at the chart, it is straightforward
that in practice there is always a unique tari scheme that minimizes the customer's bill given her

6 In

practice, there are two more assumptions. First, customers do not send MMS as it was mentioned before. Second,

in the Mozaik plan customers select the free option of having out of network calls for inside prices, and do not buy other
options. (But I keep in mind that the further options may give extra utility to the customer, which will be captured as
an add-on feature in the model.)

Note: Line thickness is proportional to Internet allowance. Taris may vary in other characteristics. Domino family is pre-paid, other taris are contractual.

Figure 1: Billing under selected taris

amount of usage. Note, however, that the size of the bill is not the only variable that exercises inuence
on the customers' utility. For instance, the amount of Internet allowance, the availability of non-stop
technical assistance or even the plan type - e.g. three-part vs. two-part (Lambrecht et al. 2007) - may
have an impact on customers' utility and, consequently, on tari choice. The next section introduces
a discrete/continuous choice model, which takes into account the wide range of factors presumably
inuencing tari choice and usage.

3 The model
Customers choose a tari at the beginning of each billing period (month), and conditional on the
chosen tari they decide about their monthly usage. Thereby, tari decision is separated from usage
decision. Naturally, customers can decide to stay with their existing tari. They can also leave the
provider (by choosing a plan of another provider) or newly subscribe (by leaving another provider in
favor of the analyzed provider).
I let both the tari choice and the decision about usage under a given tari to be inuenced by
the characteristics of the tari and other observed - such as appliance type (Gerpott et al.
- and unobserved factors.

2012)

Previous research have shown that customers face substantial switching

cost in case of leaving their provider (Grzybowski 2008) and that the initial provider choice aects
their information set (Moshkin and Schachar 2002). Therefore, tari choice is also a function of the
switching cost within plans of the provider and the cost of switching to another provider (i.e. churn).
The provider oers

taris (of

dierent types) from which the

customers can choose. Taris

consist of an access price (Aj ) that may be spent on usage within the allowance, a xed cost (Fj ) that
cannot be spent on usage, a marginal price (pj ) charged for each composite minute if usage exceeds
the monthly allowance

7 and a set of add-on features (X ). At each time

j

optimal usage q ijt and the amount spent on outside goods

customer

chooses her

q i0t that maximizes her utility given her

budget constraint. As usual in the literature (Iyengar et al. 2007; Lambrecht et al. 2007; Ascarza et
al. 2012), I use a quadratic utility function that incorporates a nite number

dijt

corresponding to the

customer's satiation level for mobile-services under a specic tari and in a given period. Thus, the
utility provided by tari

(
Uijt (qijt,i0t ) = ci

to customer

at time

is

"
#
)
2
(qijt
+ d2ijt )
1
dijt qijt
+ qi0t + ijt ,
bi
2
bi , ci , dijt > 0, dijt < ,

where

ci

is the marginal utility of income,

bi

is the customer's sensitivity to the usage price (which

may depend on demographic and locational characteristics),

consumed by the user and

ijt

(1)

qijt

is the quantity of composite minutes

represents other observed and unobserved factors.

The budget constraint is given by

7 Note

that in the case of T-Mobile marginal price is actually used to determine the allowance. However, for modeling

considerations marginal price is set to zero as long as usage is within the allowance.

yit = qi0t + Fj + Aj + (qijt qj )Iqijt qj pj ,

where

yit

is the total budget of the customer and

if usage exceeds allowance

qj ,

Iqijt qj

(2)

is an indicator variable equal to one only

otherwise zero.

It is then straightforward to derive the customer's optimal usage, which gets

q ijt

ijt
= dijt bi pj

q
j

if

dijt qj

if

dijt bi pj > qj

if

dijt bi pj qj dijt .

(3)

The rst line in Equation 3 reects the situation where satiation point is within the allowance. The
second line accounts for situations where optimal consumption exceeds the allowance. The third line
corresponds to the case where satiation level is at least as high as the allowance, but since positive
marginal prices apply, the consumer decides to use no more than the allowance.
Recall that pay-per-use tari is a special case of two-part taris where the xed cost is set to zero,
two-part tari is a special three-part tari where allowance is zero, and at rate is a unique three-part
tari where allowance is innite. Also note that in the case of T-Mobile, xed cost (which cannot be
spent on usage) only applies to two-part taris, and access-fee (which may be spent on usage) only to
three-part and at rate taris. Thus, substituting the unique characteristics of the tari types we can
derive the optimal consumption under each of the taris.

Optimal usage under two-part (2P) and pay-per-use (PPU) taris

;P P U
q 2P
ijt

0
=
d

bi pj

dijt bi pj

if

dijt > bi pj .

(4)

Optimal usage under three-part (3P) tari

q 3P
ijt

ijt
= dijt bi pj

q
j

ijt

if

if

dijt qj

if

dijt bi pj > qj

if

dijt bi pj qj dijt .

(5)

Optimal usage under at rate (FR)

R
qF
ijt = dijt .

(6)

By substituting the optimal usage equation into the utility function gives the conditional indirect
utility function

c (y Fj Aj ) + ijt

i h it
3P
(yit , pj , Fj ) = ci yit Fj Aj + pj qj . . .
Vijt

 i


d b i pj p +
j
ijt
ijt
2

if

q ijt qj
(7)

if

q ijt > qj ,

which represents the general case (and also the three-part tari case) and which simplies to


ci (yit Fj ) + ijt
2P
h

Vijt
(yit , pj , Fj ) =
ci yit Fj dijt

bi pj
2

pj + ijt

if

q ijt = 0

if

q ijt > 0

(8)

under two-part taris, to

ci (yit ) + ijt
PPU
h

Vijt
(yit , pj , Fj ) =
ci yit dijt

b i pj
2

pj + ijt

if

q ijt = 0

if

q ijt > 0

(9)

under pay-per-use taris and to

FR
Vijt
(yit , pj , Fj ) = ci (yit Fj Aj ) + ijt

(10)

under at rate.

I assume that besides marginal and access prices the tari choice is driven by the following observed
variables:

Time-varying switching costs (SCjt ), which depend on the time until the loyalty on the current
contract or current tari expires. We can assume that switching cost (i.e. cost of a tari-switch
within company or of churn) is proportional to the cumulated sum of the access prices until the

end of loyalty.

Non-monetary cost of switching to another provider (Ij ).

Features of taris besides allowance and prices of calls and texting summarized in matrix
size

J K

of

including

Internet allowance (MByte)

a dummy if fast-speed instead of low-speed Internet is provided

add-on feature dummies (entertainment card, other discounts, etc.)

10

Appliance used by the customer (Zil ); dummy variables for iPhone, Android, etc. arranged in a

I L
IT ,

11

matrix (Gerpott et al. 2012).

J M

matrix of dummy variables mapping taris to tari types (PPU,2P,3P,FR) in order

12

to take into account tari-type xed-eects.

8 Note

that switching cost in this setting is paid not necessarily at once, thus we have to account for the discrepancy

between the one-period utility-maximization process and the many-period-long switching cost.

9 Internet

(allowance and speed) may act as a substitute to calling or texting, thus it may be modeled using a more

elaborate utility function (e.g. CES). However, for the sake of simplicity, for now I add it linearly to the model. This
simplication goes in line with the ndings of Gerpott (2010) that mobile Internet is only imperfect substitute of calling
and texting and that users who also used Internet did not reduce their calling minutes.

10 The

model could be extended to incorporate individual heterogeneity by assuming that add-on feature elasticities

are individual specic and follows a pre-dened distribution.

11 If demographic and
12 Generally speaking,

location variables at individual level were available, these would be logically added here.
a dummy if the plan is prepaid (PP) and its potentially interactions with PPU,2P and 3P could

be added as well. However, since all 2P and PPU are pre-paid at T-Mobile, it would cancel out in our case because of
perfect multicollinarity. Thus, I cannot seperate preferences towards pre-paid and PPU or 2P taris here. Given that
most of the oered taris are 3P, this type of tari can be selected as reference group.

10

Tari- and individual-specic advertisement (ADijt ), in the form of a call from the customer
service suggesting to switch to a at rate plan because the user (given her consumption) would
be better o under it.

ADijt

equals 1 if the user had received such a call, otherwise 0.

ADijt

may be a function of the customer's (past) usage and tari as the company can select who to
target with the campaign. The impact of advertising on tari choice
to advertising

ij

ij , and the usage elasticity

are dened to be user-specic and to depend on the distance between the

individual's usage and the oered plan (Ascarza et al. 2013).

Consequently,

ijt

is expressed as

T
T
ijt = 1 SCjt
IjT + 2 IjP + Ijm
mi + Xjk kU + Zil lU + ij ADijt + ijt ,
where

ijt

(11)

is an independent and unobserved preference shifter the customer knows at the time of

13

tari choice assumed to follow a Type 1 extreme value distribution.

the monetary switching cost and

captures the sensitivity to

to the non-monetary cost of churn. The

matrix incorporates

unobserved preferences towards tari types. These preferences are assumed to follow a joint normal
distribution across the population with mean zero and variance-covariance matrix

. mi

may

embody preference for free minutes (Lambrecht et al. 2007) during which one does not have to worry
about the her bill in each minute, or may capture aversion to a high access price. Thus, it is known
to the customer but unknown to the researcher. Parameter vectors

and

measure the impact on

tari choice of add-on features and appliance type, respectively.

Following Ascarza et al. (2012), I specify the satiation point of the customer as a function of a usage
shock

it

that is multiplicative according to the mean usage of the customer since heavy users tend

to have larger variance than average users. I assume that

it

is gamma distributed and independent

of past usage shocks, and that mean usage is a function of seasonality (ht ), tari-type xed-eects,
other tari characteristics, appliance type, customer-tari-specic advertising and other factors (i )
that are known to the customer but unobserved by the researcher.

is assumed to follow a normal

2
distribution with mean and variance ( , ).
Thus the satiation (demand intercept) gets

T
dijt = it exp(ht at + Ijm
mi + Xjk kD + Zil lD + ij ADijt + i ),
where

a is a vector of seasonal (e.g.

matrix reects the heterogeneous

summer holiday) eects, the

14 (rows of
usage behavior across the population under a certain type of tari
a joint normal distribution with zero mean and covariance matrix
to the add-on features, while

(12)

) ,

are assumed to follow

measures usage elasticity

15

stands for the eect of appliance type on usage.

Note that there is a stochastic element in the demand equation that customers do not know when
selecting the tari, but they know the distribution of it. Thus, customers chose between taris according to their expected usage on each tari. Therefore, we obtain the expected indirect utility function

13 Note

that if data provides enough variation, certain elements of

and

may be interacted. For instance, it may

be worth to assume that smart-phone users sign up for plans with large Internet allowance.

14 Note

that since usage decision is taken after the tari choice, when deciding about usage the tari-type dummy is

eective only for the current tari.

15 The

tari from which users switch may be taken into account in an extension of the model.

11

by taking expectations over the uncertain shock

it (see

Iyengar et al. 2007; Lambrecht et al. 2007;

Ascarza et al. 2012).

In general, this means that the expected indirect utility can be expressed as





E [Vijt ] = P (q ijt qj )E Vijt |q ijt < qj + P (q ijt > qj )E Vijt |q ijt > qj ,

(13)

which is realized according to the tari type;

under three-part tari as

 3P 
E Vijt
= P (q ijt < qj )ci (yit Fj Aj ) + P (q ijt > qj )

1
T
3P,i . . .
ci yit Fj Aj + bi p2j E(it exp(ht at + Ijm,3P
2
+

Xjk kD

Zil lD

+ ij ADijt +

i |q ijt


> qj )pj + ijt ,

(14)

under two-part tari as

 2P 
E Vijt
= P (q ijt = 0j )ci (yit Fj ) + P (q ijt > 0)

1
T
ci yit Fj + bi p2j E(it exp(ht at + Ijm,2P
2P,i . . .
2
+

Xjk kD

Zil lD

+ ij ADijt +

i |q ijt


> 0)pj + ijt

(15)


+ Xjk kD + Zil lD + ij ADijt + i |q ijt > 0)pj + ijt ,

(16)

under pay-per-use tari as

 PPU
E Vijt
= P (q ijt = 0j )ci (yit ) + P (q ijt > 0)

1
T
ci yit + bi p2j E(it exp(ht at + Ijm,P
P U P P U,i . . .
2

and under at rate as

 F R
E Vijt
= ci (yit Fj Aj ) + ijt .

(17)

Should the customer choose to leave the provider, her expected utility would become

E [Vi0t ] = ci yit + i0t .

(18)

The model parameters can be estimated by using a hierarchical Bayes framework upon having
sucient variation (i.e. a relatively large pool of customers who heterogeneously switched taris) in
the data (Iyengar et al.

2007; Lambrecht et al.

2007; Narayan et al.

2007; Ascarza et al.

2012).

Generally speaking, a 12-month-long observation period including 2-3 months before the introduction

12

the at rate taris and 9-10 months thereafter could be sucient.

Nevertheless, the longer is the

observed period, the more likely is that the estimation can be carried out in a satisfying manner.
The model presented in this chapter can be seen as the benchmark model to which restricted (and
augmented, see Discussion and footnotes of this chapter) model versions could be compared.

Such

an exercise would determine which one is the best-tting model. It would also enable the researcher
to identify elements that are crucial in understanding tari choice and mobile-usage behavior, and
elements that do not have signicant explanatory power, thus may be omitted from the models.
Comparison is, then, a matter of empirical investigation.

4 Managerial implications
One of the ultimate goals of modeling usage under a wide range of available taris is to gain insight into
customers' behavior that can be leveraged to increase provider's revenue. Obtaining precise parameters
can also be utilized for ne-tuning the tari structure of the analyzed company in order to obtain the
prot-maximizing set of taris.
Previous studies have highlighted the managerial importance of understanding customer preferences
towards dierent types of taris. Ascarza et al. (2012) showed that customers gain higher utility from
usage under three-part taris than two-part taris, and that this eect accounts for around 20% of
the revenue generated from three-part tari customers. Iyengar et al. (2011) found that customers
are more likely to leave the provider and consume less under two-part taris than pay-per-use taris.
They estimated that should the company erroneously set its prices without considering these eects,
such a mistake may lead to an 11% drop in prot. Another essential element of decision making is
consumption uncertainty, which if ignored results in an underestimate of the quantity a customer uses
(Iyengar et al.

2008).

Customers' expected usage level can also be leveraged by the rm since the

higher the mean expected consumption level of at rate users the easier it is to increase revenue by
further raising the access fee (Miravete 2002). These results emphasize the importance of nding the
revenue-maximizing combination of marginal price, access price and allowance. Iyengar et al. (2008)
showed that such a combination can be found provided having the estimated parameters in hand.
Consequently, the model presented in the previous chapter can be applied to run simulations on
the expected eect on revenue of changes in prices and allowances. For instance, the model has the
power to estimate the consequences of an increase in the access fee of a given tari; which customers
would stay with the tari, who would switch to another tari, who would decide to leave the provider,
and whether the increased price turns out to be protable to the company or not.
The investigation, however, can go even beyond the identication of optimal prices given the
current set of oered taris. Providers have the possibility to introduce new or withdraw existing tari
plans. A new plan can consist of a combination of prices and allowances, but also of selected add-on
features. A well-designed new tari could be extremely protable to the company: Natter et al. (2007)
recommended one to an Austrian provider resulting in an additional (i.e., above-benchmark) prot of
$28,000,000. Since customer's preferences about add-on features can be estimated with the model, the
impact of customers' sorting to taris if a new one is introduced can be derived as well.
On the other hand, the gains and losses from the elimination of a tari from the oered set can

13

also be forecasted. By the withdrawal of a tari losses may accrue since more taris allow for better
segmentation in the market (Natter et al. 2008), but the elimination of a tari also has a benecial
side. Several taris mean considerable administrative cost and also require greater marketing eort to
explain the dierences among the various taris (Huit et al. 2007). Too many of them are likely to
confuse customers (Human and Kahn 1998) and even worse, may demotivate and prevent them from
making a choice (Iyengar and Lepper 2000). For instance, survey data on the Austrian market (which
is geographically adjacent to the Hungarian market, thus may provide meaningful lesson to our case)
revealed that respondents were perplexed by the dierent cell-phone taris in that market (Natter et
al. 2008).
It has been shown that a rm's marginal benet decreases as it adds more versions to its tari
structure (Hui et al. 2007) and that many taris increase protability only slightly (Schlereth et al.
2010). Narayan et al. (2007) calculated that the provider they analyzed indeed lost revenue due to
the introduction of a two-part tari to the existing at rate plan. Schlereth et al. (2010) found that
the combination of a pay-per-use and at rate plan leads to greater protability than the pay-peruse or at rate tari alone, but a tari structure that combines both pay-per-use, two-part and at
rate taris performs worse than the tari structure that contains only a two-part tari.

Hui et al.

(2007) conclude that a small number of versions are sucient to capture the majority of the potential
prot from versioning. It was the American T-Mobile who brought it to the extreme by now oering
only two taris to individual customers: one at rate plan without and another one with unlimited
international call allowance. Their slogan reects the provider's strategy: Choosing a plan has never
been this simple.

16

Taken all these together, companies may benet from a reduced set of oered taris. Recall that
the revenue under virtually any set of taris can be forecasted by simulation methods. Also note that
if the rm oers a subset of taris that are very similar to each other, this subset attracts the same
customer base, and therefore does not segment the market eciently. Assuming that customers value
a reduced tari list they understand without getting confused, one may start the reduction with the
taris that are indistinguishable from the rest and does not contribute to the market segmentation.
T-Mobile now oers some taris that fall under this category.
Table 2 shows the extent with each of the currently oered taris is dierent from the rest. To
obtain these results, I analyzed how the total bill under each tari varies in the 0-500 composite
minute consumption range and compared these amounts to the bills that would have been obtained
under another tari. By repeating this exercise for all of the taris, I was able to obtain a concise
summary of the bill variance each of the taris oers and the dissimilarity rank of each tari (for
detailed methodology see Appendix). To ensure robustness of the ndings, I calculate the bill variance
based both on the mean and median distance of the tari from other taris. These numbers are then

17 In short, if the bill of a

used to identify the ability of each tari to be distinguishable from the rest.

tari is almost the same (signicantly dierent) for every usage level as of another tari with the same
usage, the tari has a low (high) bill variance value, and is ranked low (high) in the index. Clearly,
there are taris that show high bill variance (Next XL, Mozaik XXL and Domino) and presumably
substantially contribute to market segmentation.

On the other hand, some of the taris fail to be

16 http://www.t-mobile.com/cell-phone-plans/individual.html
17 Note that by the calculation of tari dissimilarity add-on features

14

are not taken into account.

Table 2: Tari dissimilarity at T-Mobile

Tari

Bill variance (mean)

Bill variance (median)

Dissimilarity rank

Next XL

0.681

0.761

Mozaik XXL

0.236

0.263

Domino

0.264

0.244

Mozaik XL

0.137

0.139

Next M

0.101

0.080

Hello holnap - Hang & adat

0.136

0.034

Mozaik L

0.091

0.052

Mozaik M

0.085

0.023

11

Domino Aktv

0.096

0.006

11

Mozaik S

0.085

0.008

11

Domino 5

0.091

0.006

11

Move XS

0.084

0.007

13

Eco XS

0.085

0.007

13

Fun S

0.089

0.004

13

Move M

0.083

0.007

15

Mozaik XS

0.087

0.002

15

Eco Surf

0.081

0.006

16

Domino Surf

0.084

0.005

16

Hello holnap - Sms & adat

0.086

0.002

16

Move S

0.083

0.004

18

Note: Individual taris available to not-VIP users. No extra discount or loyalty contract on tari.

dierentiable from the rest and their ability to segment the market is, therefore, questionable. Using
the presented model, revenues under dierent subsets of taris can be compared, and recommendations
can be given about which subsets perform the best.
Besides contributing to the development of the prot-maximizing tari structure, the model can be
used to give recommendations to the provider about which customer segment is worth to be targeted by
a tari-specic marketing campaign (e.g. customer-service calls or messages recommending a at rate
plan). Proper targeting is crucial to the company as Ascarza et al. (2013) showed that a badly designed
campaign may not only be ineective but can easily lead to a signicant fall in revenue. This drop comes
from the increased churn among customers who received tari-specic recommendation but rejected
it, and could have been be avoided by targeting only the customers who have a high probability of
accepting the oer. As a consequence, providers who (plan to) run tari-specic marketing campaigns
would benet from an apriori investigation of their expected eects.

5 Discussion
Mobile Internet usage is rapidly spreading among customers and several mobile network operators
have introduced at rate tari schemes concurrently. Presumably, these will become - if are not now indispensable features of the mobile-telephony industry. This not only has implications for managers
but also for academics; marketing models need to address these developments in order to understand
decisions of mobile-phone users who nowadays can choose from a wide range of taris and add-on
features. The goal of this paper is to incorporate various elements of cell-phone tari oerings that
have been previously neglected in the literature into the state-of-the art modeling framework. To do
so, I augment the Ascarza et al. (2012) discrete/continuous choice model by allowing customers to
have heterogeneous preferences towards add-on features - such as Internet allowance or download speed

15

- and choose their plan accordingly. I also add the recently emerged cell-phone tari structure at
rate to the list of available taris. Furthermore, I let the switching cost depend on the time until the
end of loyalty contract and plan choice and usage depend on the appliance of the customer. These
modications make the model more realistic and allow the researcher to investigate several questions
regarding consumer behavior and protability. Marketing managers are likely to be interested in the
answers to these questions, too.
The recent model can be used to simulate how rm's revenue reacts to changes in the access fee, call
price and allowance of any tari from the oered list. This is possible since we can follow customers
and forecast whether they will remain with their current tari, switch to another one or leave the
provider.

The investigation can be easily extended to analyze customer's behavior under dierent

subsets of the current taris. In other words, revenue can be predicted had one or more taris become
(un)available. Consequently, with simulation methods we can answer the question whether T-Mobile's
recent introduction of at rate schemes is eventually protable or not. Besides these, the model can
be used to identify the customer segments that will likely react positively to a tari-specic marketing
campaign, thereby preventing the company of running an inecient campaign that can result in a
loss of revenue due to customer's churn. In addition, the investigation can be naturally extended to
individual users with VIP status, and thus, enjoying discounts on certain taris. Corporate clients'
behavior could be addressed as well, though it may require certain modications in the model to take
into account that the decision making process in a company may dier from the individual one (Aribarg
et al. 2010).
Although the present model is certainly very comprehensive, this does not mean that there is no
avenue for further extensions. Some elements of the model that are now assumed to be exogenous and
are introduced in a reduced form may be endogenized in further models.

For instance, appliance's

inuence on usage now appears in a reduced form, but one may build a model in which the purchase
of the appliance depends on the expected usage under a certain tari. Similarly, an extended model
may endogenize switching fees by assuming that customers jointly decide about which tari to select
and what kind of a loyalty contract to sign.

Finally, one may lift the simplication that users call

and text to certain destinations (and peak/non-peak times) in a pre-specied ratio. Note, however,
that to estimate the parameters of such extended models may require extremely detailed data covering
many years. Also note that the potential gains from shifting towards a fully structural model may be
outweighed by the cost of its complexity; e.g.

additional distributional assumptions or convergence

problems due to the increased number of parameters. Thus, researchers have to take both the cost
and benet sides of the model augmentation into account when it comes to the agenda.
The issue of introduction of a new tari may also become the interest of broader literature that
addresses causes and consequences of new product introduction (Gatignon et al. 1997) or market entry
(Koski and Kretschmer 2005). Questions such as What is the optimal competitive response to a new
tari by the competitor?

or What are the benets of the pioneer who invents a new tari type?

could arise and be answered by marketing scholars in future research.

16

Appendix
Method of calculating tari dissimilarity
Let

Bj,q

denote to the bill a customer has to pay under tari

and composite usage

q,

to the bill she would have to pay given the same composite usage but under a dierent tari
rm oers

dierent taris, the mean bill variance of tari

BVjM ean

1
J 1 max

q
J
X
X

k.

Bk,q

If the

can be calculated as

1
j,k;j6=k

and

hP
q

q=0 (Bj,q

Bk,q )2

(Bj,q Bk,q )2 ,

k=1;k6=j q=0
1
P
is a scaling factor and
maxj,k;j6=k [ qq=0
(Bj,q Bk,q )2 ]
the aggregation, which I set to 500 here.
where

q is

the selected maximum usage level of

The median bill variance equals

BVjM edian

mediank;k6=j

n
maxj,k;j6=k

q
J
X
X

hP

q
q=0 (Bj,q

Bk,q )2

o
(Bj,q Bk,q )2 .

k=1;k6=j q=0
The dissimilarity rank of a tari is then equal to the highest integer not exceeding the mean of the
rank order of tari

in the decreasing list of taris based on their mean and median bill variance,

BV M ean

DISj = oor

Rankj

+ RankBV
j
2

M edian

!
.

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