Selling to Overconfident Consumers
By Michael Grubb. 2009
358 citations recorded by the source corpus.
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 cellphone service pricing plans in the US 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.
Subfields: Economics and Econometrics, Marketing, Strategy and Management
View Paper: https://www.semanticscholar.org/paper/593ff6af704d75d0e4bd7fb99e19a56079ee2be9
How researchers see this paper
The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.
In Economics and Econometrics
- Richard G. Newell
- B. Kőszegi
- R. Stavins
- Paul Heidhues
- Michael Grubb
- Hunt Allcott
- Todd D. Gerarden
- Karen Clay
In Marketing
- B. Kőszegi
- Hunt Allcott
- Michael Grubb
- Paul Heidhues
- Karen Clay
- R. Goettler
- Stephen Leider
- Ian Larkin
In Strategy and Management
- B. Kőszegi
- Hunt Allcott
- Michael Grubb
- Paul Heidhues
- Karen Clay
- Stephen Leider
- Ian Larkin
- R. Goettler
Citations in the corpus
- Assessing the Energy-Efficiency Gap (2017, background): “Evidence from other settings may be instructive: consumer decisions about mobile phone and health club contracts suggest biased beliefs about product usage (DellaVigna and Malmendier 2006; Grubb 2009).”
- Tariff Choice with Consumer Learning and Switching Costs (2011, background): “The authors gratefully acknowledge helpful comments from Dan Ackerberg, J.P. Dubé, Shane Greenstein, Bob Miller, Christine Parlour, Uday Rajan, and Holger Sieg.”
- Incentive Schemes, Sorting and Behavioral Biases of Employees: Experimental Evidence (2012, background): “Similarly, Grubb (2009) shows that data on three-part cell phone contract terms closely match a theoretical model on consumer overconfidence about future use.”
- The Welfare Effects of Misperceived Product Costs: Data and Calibrations from the Automobile Market (2013, background): “Other recent papers have documented that consumers choose contracts for mobile phones (Grubb 2009), health clubs (DellaVigna and Malmendier 2006), and credit cards (Shui and Aububel 2005) that do not minimize ex-ante expected costs, suggesting that they misestimate future product usage.”
- Overconfident Consumers in the Marketplace (2015, background): “Less obvious is the fact that overprecision in demand forecasts can also lead to contract undervaluation (Grubb, 2009).”