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/lp/american-economic-association/selling-to-overconfident-consumers-Va5fjs2eud
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- Publisher
- American Economic Association
- Copyright
- Copyright © 2009 by the American Economic Association
- Subject
- Articles
- ISSN
- 0002-8282
- DOI
- 10.1257/aer.99.5.1770
- Publisher site
- See Article on Publisher Site
Abstract
Consumers may overestimate the precision of their demand forecasts. This overconfidence creates an incentive for both monopolists and competitive firms to offer tariffs with included quantities at zero marginal cost, followed by steep marginal charges. This matches observed cellular phone service pricing plans in the United States and elsewhere. An alternative explanation with common priors can be ruled out in favor of overconfidence based on observed customer usage patterns for a major US cellular phone service provider. The model can be reinterpreted to explain the use of flat rates and late fees in rental markets, and teaser rates on loans. Nevertheless, firms may benefit from consumers losing their overconfidence. (JEL D12, L11, L96 )
Journal
American Economic Review – American Economic Association
Published: Dec 1, 2009