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

Michael Grubb and Matthew Osborne ()
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Matthew Osborne: Bureau of Economic Analysis, U.S. Department of Commerce

No 829, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: By April 2013, the FCC's recent bill-shock agreement with cellular carriers requires consumers be notified when exceeding usage allowances. Will the agreement help or hurt consumers? To answer this question, we estimate a model of consumer plan choice, usage, and learning using a panel of cellular bills. Our model predicts that the agreement will lower average consumer welfare by $2 per year because firms will respond by raising monthly fees. Our approach is based on novel evidence that consumers are inattentive to past usage (meaning that bill-shock alerts are informative) and advances structural modeling of demand in situations where multipart tariffs induce marginal-price uncertainty. Additionally, our model estimates show that an average consumer underestimates both the mean and variance of future calling. These biases cost consumers $42 per year at existing prices. Moreover, absent bias, the bill-shock agreement would have little to no effect.

Keywords: bill shock; biased beliefs; learning; inattention; cellular; telecommunications; overconfidence (search for similar items in EconPapers)
JEL-codes: D8 L1 L96 (search for similar items in EconPapers)
Date: 2012-02-27
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Citations: View citations in EconPapers (17)

Published, American Economic Review, 2015, 105:1, 234-271

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Journal Article: Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:829

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