Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 10

Recently, an Internet service provider (ISP) in the UK implemented a "no-strings US-style flat-rate plan" whereby its commercial subscribers can send and receive unlimited volume (measured in gigabytes) up to a cap of 10,000 gigabytes (per month) via their broadband Internet service for a flat monthly fee of £399.99. Under the old "metered plan," Alistair Willoughby Cook sent and received a grand total of 3,500 gigabytes over their broadband connection and paid £399.99 in usage fees in a typical 30-day month. If all customers are exactly like Alistair, what is the impact of the flat-rate plan on consumer welfare and the company's profits? Explain.