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Selling to Overconfident Consumers

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  • Michael D. Grubb

    () (Stanford University)

Abstract

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 cellphone service pricing plans in the US 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.

Suggested Citation

  • Michael D. Grubb, 2006. "Selling to Overconfident Consumers," Discussion Papers 06-018, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:06-018
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    References listed on IDEAS

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    More about this item

    Keywords

    overconfident consumers; cellphone plans; rental markets; teaser rates;

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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