Contracts, Biases and Consumption of Access Services
AbstractWe consider a consumption model that takes into account the valuation and demand uncertainties that consumers face while using access services. Typical examples of such services include telecommunication services, extended warranties for consumer electronics, and club memberships. We demonstrate that consumption is affected by contract structure (pay-peruse vs. three part tariffs) even if the optimal consumption plans are identical. We find that a majority of individuals correctly use a threshold policy that is similar to a nearly optimal heuristic, however they use the free units too quickly leading to overconsumption and lost surplus. These errors are partially driven by mistaken beliefs about the value distribution. We also measure subjectsâ willingness to pay for a contract with free access units, and we find that nearly half of subjects are willing to pay at least the full per-unit price, with a substantial fraction willing to overpay. The optimal firm strategy is therefore to offer a contract that presells access units at a very small discount; this strategy increases revenue by 8 − 15% compared to only offering a pay-per-use contract.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3698.
Date of creation: 2012
Date of revision:
access services; pricing contracts; decision biases; experiment;
Find related papers by JEL classification:
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D03 - Microeconomics - - General - - - Behavioral Economics; Underlying Principles
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
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