Consumer Inattention and Bill-Shock Regulation

Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock

“…Pricing in column 4 can be understood as a response to conditional mean bias. Estimated conditional mean bias implies that those who choose plan 1 underestimate their usage (so that an overage rate above marginal cost is optimal) but those who choose plan 2 overestimate their usage (so that charging an overage rate below marginal cost is optimal) (Grubb 2009). …”

“…In the context of our model, systematic differences at the population level between these beliefs and actual usage identify choice patterns consistent with consumer biases such as overconfidence. Identifying consumer biases is important for our endogenous-price counterfactual simulations because firm pricing decisions are strongly influenced by overconfidence and other biases (Grubb 2009). …”

Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock

“…(This is in contrast to Ater and Landsman's (2013) finding that checking account customers who have paid overage fees switch towards checking plans that raise, rather than lower, their bills.) Finally, our counterfactual simulations with endogenous prices relate to the literatures on monopoly sequential-screening (surveyed by Rochet and Stole ((2003), Section 8), competitive static-screening (surveyed by Stole (2007)), and optimal contracting with non-standard consumers (for which Spiegler (2011) provides a good guide, and of particular relevance are DellaVigna and Malmendier (2004), Eliaz and Spiegler (2006), Eliaz and Spiegler (2008), Grubb ((2009), (2012), 11 We cannot separately identify consumers' beliefs about the variance of their future tastes from their risk preferences over the resulting variation in their bills. When we observe consumers choose overly risky plans we infer that they underestimate the risk by underestimating the variance of their future tastes.…”

“…However, annual total welfare and consumer surplus both fall, by $26 per person and $33 per person, respectively. Note that bill-shock alerts are only relevant if firms offer three-part tariffs, which Grubb (2009) shows are tailored to exploit overconfidence. Thus, absent consumer biases, we find that firms offer two-part tariffs rather than three-part tariffs, so that bill-shock regulation has no effect.…”

“…As we show in Section 3.2 Figure 2, students respond strongly to marginal prices. In response to point 2), note that a pricing manager from one of the top US cellular phone service providers made the unsolicited comment that the empirical patterns of usage, overages, and ex post "mistakes" documented in Grubb (2009) using the same data were highly consistent with their own internal analysis of much larger and representative customer samples.…”