Allowing consumers to bundle themselves: The profitability of family plans

Telecommunications service is an important and growing market, with worldwide revenue exceeding $2.2 trillion in 2016. In the U.S. market, the total number of mobile wireless connections has grown from 279.6 million in 2008 to 396 million in 2016. All the firms in this market offer consumers an option of purchasing either an individual plan or a family plan. Whereas a menu of individual plans can be thought of as a means to segment the market, the theoretical challenge is to understand how a firm stands to benefit from adding family plans to its product mix. In this paper, we use a game-theoretic framework to explore the role of family plans. Interestingly, we find that even when a family plan does not draw in any new consumers, a firm can still benefit from offering these plans. This occurs primarily because a family plan enables the firm to price discriminate more effectively. In particular, because some consumers can bundle themselves and join a family plan, the firm is able to charge a higher price to single high-valuation consumers who are unable to be part of a family. Furthermore, the presence of a family plan can have a negative impact on the plan offered to single low-valuation consumers who now have to pay a higher overage price. We also show that not all family plans are profitable and that the profitability depends on the sizes of different types of families.

Duke Scholars

Author Preyas S. Desai Fuqua School of Business

Author Devavrat Purohit Fuqua School of Business