Testing Alternative Learning Theories: Evidence From Subscription Contracts

Itai Ater and Vardit Landsman

Journal of Industrial Economics, 2018, vol. 66, issue 4, 763-815

Abstract: Analyzing panel data of 32,650 checking‐account holders facing a menu of three‐part tariff contracts, we document several findings that indicate that subscribers use simple heuristics to learn about the desirability of the contracts they have chosen. Our main findings are: subscribers change contracts in a direction that diminishes the probability of re–experiencing the trigger for switching; subscribers exhibit recency effects in switching; and after switching the majority of switchers systematically pay higher fees than they did before. We argue that directional learning theory best explains why consumers behave in a manner that yields suboptimal economic outcomes.

Date: 2018
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