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

Michael D. Grubb

Boston College

Matthew Osborne

Bureau of Economic Analysis

February 27, 2012

MIT Sloan Research Paper No. 4974-12

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.

Number of Pages in PDF File: 48

Keywords: biased beliefs, learning, bill shock, inattention, FCC, cellular, telecommunications, overconfidence

JEL Classification: L11, L96, D43, D8, D18

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Date posted: January 17, 2012 ; Last revised: November 5, 2012

Suggested Citation

Grubb, Michael D. and Osborne, Matthew, Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock (February 27, 2012). MIT Sloan Research Paper No. 4974-12. Available at SSRN: http://ssrn.com/abstract=1986276 or http://dx.doi.org/10.2139/ssrn.1986276

Contact Information

Michael D. Grubb (Contact Author)
Boston College ( email )
United States
617-552-1569 (Phone)
HOME PAGE: http://https://www2.bc.edu/michael-grubb/
Matthew Osborne
Bureau of Economic Analysis ( email )
1441 L Street NW
Washington, DC 20910
United States
202-606-9618 (Phone)
HOME PAGE: http://sites.google.com/site/matthewosborne/
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