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Selling to Overconfident Consumers

Michael D. Grubb

Boston College

May 2, 2008

Consumers may overestimate the precision of their demand forecasts. This overconfidence creates an incentive for both monopolists and competitive firms to offer tariffs with included quantities at zero marginal cost, followed by steep marginal charges. This matches observed cell-phone service pricing plans in the US and elsewhere. An alternative explanation with common priors can be ruled out in favor of overconfidence based on observed customer usage patterns for a major US cellular phone service provider. The model can be reinterpreted to explain the use of flat rates and late fees in rental markets, and teaser rates on loans. Nevertheless, firms may benefit from consumers losing their overconfidence.

Number of Pages in PDF File: 50

Keywords: overconfidence, screening, nonlinear pricing, three-part tariff, cellular, telecommunications

JEL Classification: D4, D8, L1

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Date posted: May 17, 2005 ; Last revised: September 24, 2009

Suggested Citation

Grubb, Michael D., Selling to Overconfident Consumers (May 2, 2008). Available at SSRN: https://ssrn.com/abstract=721701 or http://dx.doi.org/10.2139/ssrn.721701

Contact Information

Michael D. Grubb (Contact Author)
Boston College ( email )
United States
617-552-1569 (Phone)
HOME PAGE: http://https://www2.bc.edu/michael-grubb/
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