Selling to Overconfident Consumers
Name
Grubb_SellingToOverconfidentConsumers.pdf
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435.37 KB
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Adobe PDF
Checksum (MD5)
121e8f6d34973b255c49cafc2ac777fa
Author(s)
Grubb, Michael D.
Date Issued
December 2009
Journal
American Economic Review
Publisher
American Economic Association
Citation
Grubb, Michael D. 2009. "Selling to Overconfident Consumers." American Economic Review, 99(5): 1770–1807. DOI:10.1257/aer.99.5.1770
Version
Author's final manuscript
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.
MIT Department
Sloan School of Management
Terms of Use
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.
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DOI of Published Version
http://dx.doi.org/10.1257/aer.99.5.1770
