RATIONALIZING FLAT-RATE PRICING

Flat-rate, or buffet pricing—charging a fixed price for unlimited quantity—has gained popularity in various markets, from restaurants and telecommunication to online streaming services. We study a model of buffet pricing, explore applications, and investigate whether and under what market conditions such a pricing scheme is preferred to the common linear pricing. Buffet pricing is more profitable if consumers are sufficiently homogeneous in satiation quantity, or consumers have similar satiation utilities (and low marginal cost). Linear pricing may outperform buffet pricing when consumers are heterogeneous in satiation quantity, marginal cost is high, or consumers have large satiation quantities. Furthermore, under competition, linear pricing outperforms buffet pricing.