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Selling to Overconfident Consumers

  • Michael D. Grubb

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)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 99 (2009)
Issue (Month): 5 (December)
Pages: 1770-1807

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Handle: RePEc:aea:aecrev:v:99:y:2009:i:5:p:1770-1807
Note: DOI: 10.1257/aer.99.5.1770
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