Selling to Overconfident Consumers
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 pr...
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| Other Authors: | |
| Format: | Article |
| Language: | en_US |
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American Economic Association
2010
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| Online Access: | http://hdl.handle.net/1721.1/52652 |
| _version_ | 1811072585956327424 |
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| author | Grubb, Michael D. |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Grubb, Michael D. |
| author_sort | Grubb, Michael D. |
| collection | MIT |
| description | 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. |
| first_indexed | 2024-09-23T09:08:22Z |
| format | Article |
| id | mit-1721.1/52652 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T09:08:22Z |
| publishDate | 2010 |
| publisher | American Economic Association |
| record_format | dspace |
| spelling | mit-1721.1/526522022-09-30T13:41:40Z Selling to Overconfident Consumers Grubb, Michael D. Sloan School of Management Grubb, Michael D. Grubb, Michael D. 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. State Farm Companies Foundation Doctoral Award Taube Scholarship Fund Fellowship 2010-03-17T14:44:10Z 2010-03-17T14:44:10Z 2009-12 2008-05 Article http://purl.org/eprint/type/SubmittedJournalArticle 0002-8282 http://hdl.handle.net/1721.1/52652 Grubb, Michael D. 2009. "Selling to Overconfident Consumers." American Economic Review, 99(5): 1770–1807. DOI:10.1257/aer.99.5.1770 en_US http://dx.doi.org/10.1257/aer.99.5.1770 American Economic Review Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use. application/pdf American Economic Association Michael Grubb |
| spellingShingle | Grubb, Michael D. Selling to Overconfident Consumers |
| title | Selling to Overconfident Consumers |
| title_full | Selling to Overconfident Consumers |
| title_fullStr | Selling to Overconfident Consumers |
| title_full_unstemmed | Selling to Overconfident Consumers |
| title_short | Selling to Overconfident Consumers |
| title_sort | selling to overconfident consumers |
| url | http://hdl.handle.net/1721.1/52652 |
| work_keys_str_mv | AT grubbmichaeld sellingtooverconfidentconsumers |