The Role of Self Selection, Usage Uncertainty and Learning in the Demand for Local Telephone Service

Sridhar Narayanan

Stanford Graduate School of Business

Pradeep K. Chintagunta

University of Chicago

Eugenio J. Miravete

University of Texas at Austin; Centre for Economic Policy Research (CEPR)

March 1, 2007

Quantitative Marketing and Economics, Vol. 5, No. 1, 2007

elephone services are often characterized by the presence of ‘fixed’ plans, involving only a fixed monthly fee, as well as ‘measured’ plans, with both fixed fees and per-unit charges for usage. Consumers are faced with the decisions of which plan to choose and how much to use the phone and these decisions are not, in general, independent. Due to the presence of a time lag between plan choice and usage decisions, consumers are uncertain about usage at the plan-choice stage. We develop a structural discrete/continuous model of plan choice and usage decisions of consumers that accounts for such uncertainty. Prior research has also found that consumers switch less often from fixed plans to measured plans to gain from potential savings than vice versa. Consumer uncertainty regarding their mean usage levels and different rates of learning by consumers in the two plans is a potential explanation for this phenomenon. We extend our discrete/continuous model to account for consumer learning about their mean usage and estimate different rates of learning for the two types of plans.

We estimate our model using data from the 1986 Kentucky local telephone tariff experiment. Even in the absence of any price variation over time, we are able to measure the price elasticities both of usage and of choice of plan. Using our parameter estimates, we simulate the effects of the introduction of a metered plan in a market with only a fixed plan and vice versa, on both firm revenues and consumer surplus. We also find that consumers learn very rapidly if they are on the measured plan but learn very slowly when they are on the fixed plan. We investigate an alternative assumption on the nature of the learning process in which only consumers in the measured plan have an opportunity to learn. We find that our empirical results are robust to this change of specification. We conduct counterfactual simulations to simulate enhanced calling plans from the firm and consumer points of view. Additional simulations to measure the value of information in this category are also carried out. We compute the value of both complete information, where the entire uncertainty about future usage is resolved, as well as that of limited information, where the consumer’s uncertainty about mean usage is resolved, but the uncertainty about specific month-to-month usage remains. We find that the value of information is modest. We also find that a large proportion of the value of information is that about the mean usage, with the value of the information about a specific month's usage being relatively small.

Keywords: Self-Selection, Uncertainty, Value of Information, Discrete/Continuous Models, Learning Models, Telecommunications, Optional Calling Plans

JEL Classification: D12, D83, K23, L11, L96, M31

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Date posted: June 4, 2011  

Suggested Citation

Narayanan, Sridhar and Chintagunta, Pradeep K. and Miravete, Eugenio J., The Role of Self Selection, Usage Uncertainty and Learning in the Demand for Local Telephone Service (March 1, 2007). Quantitative Marketing and Economics, Vol. 5, No. 1, 2007. Available at SSRN: http://ssrn.com/abstract=1857177

Contact Information

Sridhar Narayanan (Contact Author)
Stanford Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States
650-723-9675 (Phone)
HOME PAGE: http://https://gsbapps.stanford.edu/facultybios/bio.asp?ID=409

Pradeep K. Chintagunta
University of Chicago ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8015 (Phone)
773-702-0458 (Fax)
Eugenio J. Miravete
University of Texas at Austin ( email )
Department of Economics
1 University Station C3100
Austin, TX 78712-0301
United States
512-232-1718 (Phone)
512-471-3510 (Fax)
HOME PAGE: http://www.eco.utexas.edu/facstaff/Miravete
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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