The Role of Expectation-Reality Discrepancy in Mobile Service Contracts

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