Competing with Menus of Tariff Options

I study how firms actually compete in nonlinear tariffs by analyzingwhether the incumbent and entrant's decisions to offer a given number oftariff options are interrelated. The goal is to shed some light on thosedynamic and strategic aspects of tariff menus that are currently ignoredby theoretical models of nonlinear pricing competition in order tohighlight some basic features of the market that future theoretical workshould address. This paper also introduces a generalized multivariatecount data model that allows to account for the possibility ofcorrelation of any sign among the pricing decisions of competing firmsin a manner that is robust to the existence of over and underdispersionof counts. Pricing strategies appear to be strategic complements thatrespond positively to the existing heterogeneity of consumers' tastes.While this is a common source driving the number of tariff optionsoffered, results also show that previous pricing decisions by theincumbent affect the entrant's current offering of tariff options, thusfree riding on information about the market revealed by the likelybetter informed firm of the industry. The strategic complementarityresult disappears when we only consider non-dominated tariffs.