2- and 3-part Cost Structures in Consumer Behavior: The 'Free' Allowance

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2- and 3-part Cost Structures in Consumer Behavior: The 'Free' Allowance
Anneke Zwart, Moderator
In the past decades, an increasing amount of companies from various industries have tried to change their pricing structures. A common seen trend, in particular among telecom providers, banks and energy providers, is the replacement of a 2-part costs structure by a 3-part costs structure:
Two Part Cost Structure: The price/cost of a certain service exists of a fixed (usually monthly) access price and a usage price for every unit consumed. These “unit’’ range messages or minutes in the telephone industry to cheque-writing in the banking industry.
Three-part Cost Structure: This structure adds a third part to the two-part cost structure, which exist of paying only for consumption that exceeds a certain usage allowance, while within the allowance you can “freely” consume.
So why do these companies do this? A study by Ascarza, Lambrecht and Vilcassim (2012) finds that the word “free” makes customers spend more for a certain service than they would otherwise. Th...



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