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Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock

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Author Info

  • Michael D. Grubb

    ()

  • Matthew Osborne

    ()
    (Bureau of Economic Analysis, U.S. Department of Commerce)

Abstract

By April 2013, the FCC's recent bill-shock agreement with cellular carriers requires consumers be notified when exceeding usage allowances. Will the agreement help or hurt consumers? To answer this question, we estimate a model of consumer plan choice, usage, and learning using a panel of cellular bills. Our model predicts that the agreement will lower average consumer welfare by $2 per year because firms will respond by raising monthly fees. Our approach is based on novel evidence that consumers are inattentive to past usage (meaning that bill-shock alerts are informative) and advances structural modeling of demand in situations where multipart tariffs induce marginal-price uncertainty. Additionally, our model estimates show that an average consumer underestimates both the mean and variance of future calling. These biases cost consumers $42 per year at existing prices. Moreover, absent bias, the bill-shock agreement would have little to no effect.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 829.

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Date of creation: 27 Feb 2012
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Handle: RePEc:boc:bocoec:829

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Related research

Keywords: bill shock; biased beliefs; learning; inattention; cellular; telecommunications; overconfidence;

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References

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Cited by:
  1. Ben Gilbert & Joshua S. Graff Zivin, 2013. "Dynamic Salience with Intermittent Billing: Evidence from Smart Electricity Meters," NBER Working Papers 19510, National Bureau of Economic Research, Inc.
  2. Justine S. Hastings & Ali Hortaçsu & Chad Syverson, 2013. "Advertising and Competition in Privatized Social Security: The Case of Mexico," NBER Working Papers 18881, National Bureau of Economic Research, Inc.
  3. Justine Hastings & Jesse M. Shapiro, 2012. "Mental Accounting and Consumer Choice: Evidence from Commodity Price Shocks," NBER Working Papers 18248, National Bureau of Economic Research, Inc.

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