The Doubtful Profitability of Foggy Pricing

A tariff option is foggywhen another option or a combination of other tariff options offered by the same firm are always less expensive regardless of the usage profile of any customer. Alternatively, tariff fogginess can also be characterized by the low likelihood that a particular tariff option end up being the least expensive one among those of amenu of tariffs plans for an arbitrary distribution of usage patterns. Taking advantage of the exogenous entry of a second carrier in the early U.S. cellular telephone industry, this paper shows that competition induces firms to abandon deceptive pricing strategies aimed to profit from mistaken choices of consumers (fog lifting) rather than inducing competitive firms to soften competition through the use of foggy tactics (co-opetition). Results indicate that tariff fogginess is less severe with the entry of a second firm in the industry according to either definition of foggy pricing. Thus competition alone, and in particular the tactics of entrants, appears to correct deceptive pricing strategies, although such correction does not necessarily occur immediately after the entry of a competitor but rather in the long run