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Choosing the Wrong Calling Plan? Ignorance, Learning, and Risk Aversion

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  • Miravete, Eugenio J

Abstract

It is commonly believed that consumers behave irrationally when subscribing optional telephone tariffs. The fact that they show a strong preference for flat rate options has commonly been interpreted as evidence of irrational behavior since such a choice is believed not to be cost-minimizing ex post in most cases. My results, obtained using the data from the 1986 Kentucky tariff experiment, contradict these views and provide strong evidence in favour of the rationality of consumers' choices. I found that expectations on future consumption play a major role in the choice of tariffs but also that consumption forecast errors are more related to the volume of local telephone usage than to any particular demographic profile. More importantly, the evidence shows that there exist important learning effects that induce tariff switching in order to minimize the magnitude of monthly bills even in the short term and responding to very small cost differences. Finally, risk aversion is ruled out as a possible source of consumers' biased taste for flat tariffs.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2562.

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Date of creation: Sep 2000
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Handle: RePEc:cpr:ceprdp:2562

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Related research

Keywords: Expectation Bias; Learning; Risk Aversion; Service Switching; Tariff Choice;

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References

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  1. Srinagesh, P., 1992. "A Dynamic Stochastic Model of choice," Papers, Bell Communications - Economic Research Group 78, Bell Communications - Economic Research Group.
  2. Eugenio J. Miravete, . "Quantity Discounts for Taste-Varying Consumers," Penn CARESS Working Papers, Penn Economics Department e8c875d525675df452b9522a2, Penn Economics Department.
  3. Miravete, Eugenio J, 2002. "Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 69(4), pages 943-71, October.
  4. Clay, Karen B & Sibley, David S & Srinagesh, Padmanabhan, 1992. "Ex Post vs. Ex Ante Pricing: Optional Calling Plans and Tapered Tariffs," Journal of Regulatory Economics, Springer, Springer, vol. 4(2), pages 115-38, June.
  5. Kridel, Donald J. & Lehman, Dale E. & Weisman, Dennis L., 1993. "Option value, telecommunications demand, and policy," Information Economics and Policy, Elsevier, vol. 5(2), pages 125-144, July.
  6. Butler, J S & Moffitt, Robert, 1982. "A Computationally Efficient Quadrature Procedure for the One-Factor Multinomial Probit Model," Econometrica, Econometric Society, Econometric Society, vol. 50(3), pages 761-64, May.
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Cited by:
  1. Eugenio J. Miravete, 2003. "Choosing the Wrong Calling Plan? Ignorance and Learning," American Economic Review, American Economic Association, vol. 93(1), pages 297-310, March.
  2. Miravete, Eugenio J, 2002. "Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 69(4), pages 943-71, October.
  3. Miravete, Eugenio J & Palacios-Huerta, Ignacio, 2002. "Learning Temporal Preferences," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3604, C.E.P.R. Discussion Papers.
  4. Ignacio Palacios-Huerta & Roberto Serrano & Oscar Volij, 2003. "Rejecting Small Gambles Under Expected Utility," Economics Working Papers, Institute for Advanced Study, School of Social Science 0032, Institute for Advanced Study, School of Social Science.
  5. Eugenio J. Miravete, 2001. "Screening Through Bundling," Penn CARESS Working Papers, Penn Economics Department 3b8e0b3847b08b90e8570987c, Penn Economics Department.
  6. Miravete, Eugenio J, 2001. "Quantity Discounts for Time-Varying Consumers," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2699, C.E.P.R. Discussion Papers.

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