Selling to Overconfident Consumers

Grubb, Michael D.

doi:10.1257/aer.99.5.1770

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American Economic Review: Vol. 99 No. 5 (December 2009)

AER Volume. 99, Issue 5 | left

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Selling to Overconfident Consumers

Article Citation

Grubb, Michael D. 2009. "Selling to Overconfident Consumers." American Economic Review, 99(5): 1770-1807.

DOI: 10.1257/aer.99.5.1770

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)

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Authors

Grubb, Michael D. (MIT)

JEL Classifications

D12: Consumer Economics: Empirical Analysis
L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L96: Telecommunications