Selling to Overconfident Consumers
- (pp. 1770-1807)
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)Citation
Grubb, Michael D. 2009. "Selling to Overconfident Consumers." American Economic Review, 99 (5): 1770-1807. DOI: 10.1257/aer.99.5.1770Additional Materials
JEL Classification
- D12 Consumer Economics: Empirical Analysis
- L11 Production, Pricing, and Market Structure; Size Distribution of Firms
- L96 Telecommunications