Selling to Overconfident Consumers

Michael Grubb

American Economic Review, 2009, vol. 99, issue 5, 1770-1807

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 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)

JEL-codes: D12 L11 L96 (search for similar items in EconPapers)
Date: 2009
Note: DOI: 10.1257/aer.99.5.1770
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Citations: View citations in EconPapers (168)

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Working Paper: Selling to Overconfident Consumers (2006)
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