Self-selecting tariffs and its applications to multi-product monopolist under asymmetric information

Abstract

In recent years, utilities have begun to offer their customers a choice among tariffs. For example, many electric utilities offer both time-of-use and standard (non-time-differentiated) rates and allow each customer to choose the rates under which its bill will be calculated. Local phone companies in U.S. offer both flat-rate and measured service: the customer can choose to be billed either a fixed amount per month without additional charge for local calls (flat-rate service) or a lower fixed amount per month with an additional charge for each local call(measured service). Each long distance carrier offers a variety of tariffs, including WATS and WATS-like services and plans like AT&T``s "Reach Out America" program, under which the customer obtains an hour of off-peak calling each month for a fixed cost and then pays a reduced rate for additional calling. When a customer has a choice among two or more tariffs, the tariffs are called "self-selecting". Self-selecting tariffs have recently become popular for a variety of reasons. It is usually easier for a regulated firm to obtain permission from its regulator to offer a new rate schedule as an option to customers, rather than substitute for the existing schedule. For most the new tariffs, some customers would be hurt by being charged under the new schedule; for example, customers who consume a relatively large share of electricity in the peak would be hurt if their consumption were charged under time-of-use rates instead of standard rates. If a new schedule is offered as an option, customers who would be hurt under the new schedule can choose to stay on the existing schedule. This possibility prevents these customers from opposing the introduction of the new schedule. However, not all self-selecting tariff offerings allow for Pareto dominance or even increase surplus. When not appropriately designed, the introduction of a new self-selecting tariff can decrease surplus. The appropriated design of self-selecting ...