The Role of Expectation-Reality Discrepancy in Mobile Service Contracts

44 Pages Posted: 3 May 2017

See all articles by Xuying Zhao

Xuying Zhao

University of Notre Dame

Hong Guo

University of Notre Dame

Gangshu (George) Cai

Santa Clara University

Subhajyoti Bandyopadhyay

University of Florida - Warrington College of Business Administration

Date Written: April 25, 2017

Abstract

Mobile carriers used to enforce service contracts on consumers. However, recently major mobile carriers have eliminated contracts. We investigate carriers' contract and marketing strategies. We identify Expectation-Reality Discrepancy (ERD) as a key determinant. A carrier's ERD is defined as consumers' ex-ante expected valuation minus their ex-post realized valuation of the carrier's service. Main findings include: Carriers' contract strategies critically depend on their ERDs rather than the true service valuations. A carrier with a higher ERD is more likely to enforce contracts, regardless of whether the true service valuation is higher than that of her competitor. Carriers should enforce contracts only when they have positive ERDs. When both carriers have positive ERDs, cross switching occurs, resulting in that some consumers located closer to a carrier switch to the other carrier and vice versa. Contracts have the competition-intensifying effect. When carriers enforce contracts, their competition on promoting consumer expectations is intensified, leading to higher ERDs with contracts than without contracts. Finally, both contracts and positive ERD marketing strategies hurt consumer welfare.

Keywords: Mobile service contracts, expectation-reality discrepancy, pricing, competition

JEL Classification: C72, L8

Suggested Citation

Zhao, Xuying and Guo, Hong and Cai, Gangshu (George) and Bandyopadhyay, Subhajyoti, The Role of Expectation-Reality Discrepancy in Mobile Service Contracts (April 25, 2017). Available at SSRN: https://ssrn.com/abstract=2962112 or http://dx.doi.org/10.2139/ssrn.2962112

Xuying Zhao

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Hong Guo (Contact Author)

University of Notre Dame ( email )

356 Mendoza College of Business
Notre Dame, IN 46556-5646
United States

HOME PAGE: http://www.nd.edu/~hguo

Gangshu (George) Cai

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA CA 95053
United States
4085542785 (Phone)

Subhajyoti Bandyopadhyay

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

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