The Effect of Usage Uncertainty on Mobile Phone Package Size and Subscribers' Choice

Wireless services typically charge their subscribers based on a three-part tariff package that consists of a fixed monthly fee, an amount of free minutes per month (bucket size), and an overage price that is charged for all minutes in excess of the stated number of free minutes. For a subscriber, with a constant known consumption rate, the choice of a package is straightforward. However, as in many other markets, mobile phone subscribers confront uncertainty regarding their usage. In this paper, we study the role of such usage uncertainty with respect to minutes on both a service provider's package design and a subscriber's choice of package. Specifically, we study how usage uncertainty affects a firm's decisions about package size when it offers calling plans. In addition, from a subscriber's perspective, we study the effect of uncertainty on whether a subscriber stays with a plan or upgrades to another.Our main results, (analytical and empirical) are that the effect of variation in usage on the subscriber's optimal choice of free minute allotment and service package is conditional on whether the subscriber expects to use less than the entire bucket of minutes purchased. When this happens, the service provider's optimal bucket size decreases as a function of the subscriber's air-time variance. In addition, surprisingly, a subscriber's usage variance, after controlling for mean usage, is actually a negative predictor of the subscriber choosing to upgrade.