Are Consumers Myopic? Evidence from Handset and Mobile Services Choices

Abstract

In this paper, I estimate discrete choice models for handsets and mobile tariffs using a sample of 10,738 subscribers of a European mobile telecommunications operator, observed between April 2011 and December 2014. The estimates are used to compute a measure for consumers' valuation of future costs, which captures how they trade off current and future expenses when making their choices, i.e. their implicit discount rate, which can be interpreted as their level of myopia. I show that, overall, consumers undervalue future costs, with some heterogeneity across groups of consumers, and more importantly over time, as consumer's myopia reduces over the period studied. This evolution is related to structural changes in the market, namely the entry of a new competitor and the introduction of tariffs which are not bundled with phones, which impacted prices and the variety of options offered by firms, as well as consumers' awareness regarding the total costs implied by such choices. Finally, I estimate a series of counterfactuals to assess the gain in consumers' welfare resulting from the market changes, given their observed valuation of future expenses. Results from these counterfactuals suggest consumer welfare gains were driven by the overall price decline subsequent to the entry of the new competitor, but also, and more importantly, by the introduction of a new form of tariff (i.e. mobile tariffs not bundled with phones) which increased price transparency for consumers.

Keywords: Consumer Choices; Time preference; Heterogeneous preferences; Competition; Mobile telecommunications

JEL Classification: L96