Dם Customers Learn from Experience? Evidence from Retail Banking
Tel Aviv University - The Leon Recanati Graduate School of Business Administration
Tel Aviv University - Faculty of Management; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)
October 25, 2012
Management Science (2013) Vol. 59(9), 2019-2035
We study customers’ adoption and subsequent switching decisions, with regard to a menu of three-part tariff plans offered by a commercial bank. Using a rich panel data set covering 70,510 fee-based checking accounts over 30 months, before and after the introduction of the plans, we find that most customers adopt non-cost-minimizing plans, preferring plans with large monthly allowances and high fixed payments. Furthermore, after adoption, customers who exceed their allowances and consequently pay overage fees are more likely to switch to plans with larger allowances than customers who do not experience such fees. Notably, after switching, these overage-paying customers pay higher monthly payments than before. In contrast, switching customers who did not pay overage payments before switching pay less after switching. Our findings, unlike those of previous research on experience-based learning, suggest that the behavior of experienced customers does not converge to the predictions of neoclassical models. We propose that ‘overage aversion’, which is closely related to loss aversion and mental accounting, is the most plausible explanation for our findings.
Number of Pages in PDF File: 36
Keywords: tariff choice, non-linear pricing, switching, learning, flat-rate
Date posted: September 17, 2013
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