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Grubb, Michael D. 2009. "Selling to Overconfident Consumers."
,
99(5): 1770-1807.
Show Article Details
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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Appendix
Authors:
Grubb, Michael D. (MIT)
JEL Classifications:
D12: Consumer Economics: Empirical Analysis
L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L96: Telecommunications
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