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An experimental analysis of overconfidence in tariff choice

Author

Listed:
  • Katharina Dowling

    (Ludwig-Maximilians-Universität München)

  • Lucas Stich

    (Ludwig-Maximilians-Universität München)

  • Martin Spann

    (Ludwig-Maximilians-Universität München)

Abstract

Consumers regularly have to choose between a pay-per-use and a flat-rate option. Due to the increasing number and range of (digital) services, the frequency at which consumers have to make tariff-choice decisions to use these services has become even more prevalent. Prior work has demonstrated that consumers’ tariff choices are often systematically biased and identified overconfidence as one of the key drivers. Yet, prior research is non-experimental and focused on the so-called flat-rate bias. By contrast, we examine the effects of overconfidence on the choice between a pay-per-use and a flat-rate option using an experimental approach. We develop an incentive-compatible experiment to provide causal evidence for the effect of overconfidence on tariff-choice decisions. We find that overconfident (underconfident) consumers underestimate (overestimate) their actual usage, which leads them to choose a pay-per-use (flat-rate) option relatively more frequently. Based on the results, we discuss theoretical and managerial implications as well as avenues for future research.

Suggested Citation

  • Katharina Dowling & Lucas Stich & Martin Spann, 2021. "An experimental analysis of overconfidence in tariff choice," Review of Managerial Science, Springer, vol. 15(8), pages 2275-2297, November.
    • Handle: RePEc:spr:rvmgts:v:15:y:2021:i:8:d:10.1007_s11846-020-00425-w
    DOI: 10.1007/s11846-020-00425-w
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    Cited by:

    1. Jennifer Kunz & Lara Sonnenholzner, 2023. "Managerial overconfidence: promoter of or obstacle to organizational resilience?," Review of Managerial Science, Springer, vol. 17(1), pages 67-128, January.

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    More about this item

    Keywords

    Overconfidence; Tariff choice; Pay-per-use; Flat-rate; Experiment;
    All these keywords.

    JEL classification:

    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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