The Psychology of Two-Part Tariffs

This paper investigates preferences for two-part tariff pricing plans which require consumers to pay a flat fee plus a per unit surcharge for usage beyond an allowance. People have difficulty estimating the effective cost of a two-part tariff, so they apply heuristics to the most salient attributes. Compared to a normative benchmark of expected cost, these heuristics lead people to excessively choose plans with smaller flat fees, larger usage allowances, and lower overage rates. When these attributes are in conflict, people assign greater importance to comparisons of the two attributes that provide upside protection against overage charges: the usage allowance and the overage rate. The presence of usage uncertainty heightens the reliance on these comparisons, and calculating a cost does not appear to reduce them.