Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans

This Paper studies the theoretical and econometric implications of agents’ uncertainty about their future consumption when a monopolist offers them either a unique, mandatory nonlinear tariff, or a choice in advance among a menu of optional two-part tariffs. In this model, agents’ uncertainty is resolved through individual and privately known shocks on their types. In such a situation the principal may screen agents according to their ex-ante or ex-post type, by offering either a menu of optional tariffs or a standard nonlinear schedule. The theoretical implications of the model are used to evaluate the tariff experiment run by South Central Bell in two cities of Kentucky in 1986. The empirical approach explicitly accounts for the existence of informational asymmetries between local telephone users and the monopolist, leading to different, nested, econometric specifications under symmetric and asymmetric information. The empirical evidence suggests that there exists a significant asymmetry of information between consumers and the monopolist under both tariff regimes. Both expected welfare and profits fail to increase with the introduction of optional tariffs for the estimated value of the parameters.