An Experimental Analysis of Overconfidence in Tariff Choice

Katharina Dowling, Martin Spann and Lucas Stich
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Katharina Dowling: LMU Munich
Lucas Stich: LMU Munich

No 154, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: Digitalization has changed existing business models and enabled new ones. This development has been accompanied by the emergence of new pricing options and the possibility of applying established pricing models in new domains. Today, consumers can, for example, pay for accessing a product instead of buying it. Within such sharing services, consumers can usually choose between a flat-rate and a pay-per-use option. Prior work demonstrated that consumers\' tariff choices are often systematically biased. Overconfidence was identified as one of the key drivers. Yet, prior research is non-experimental and focused on the so-called flat-rate bias. By contrast, we examine the effects of overconfidence on tariff choice experimentally. We show that overconfident consumers overestimate their ability to predict their future usage, which leads them to underestimate their actual usage, and eventually leads them to choose a pay-per-use (vs. a flat-rate) option more frequently. We discuss theoretical and managerial implications.

Keywords: overconfidence; tariff choice; pay-per-use; flat-rate; experiment (search for similar items in EconPapers)
Date: 2019-05-02
New Economics Papers: this item is included in nep-dcm and nep-exp
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Journal Article: An experimental analysis of overconfidence in tariff choice (2021)
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