Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock
Michael D. Grubb
Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA)
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, D18working papers series
Date posted: January 17, 2012 ; Last revised: November 5, 2012
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