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CHOOSING THE WRONG CALLING PLAN? IGNORANCE AND LEARNING
(Click above to download a pdf copy of the paper)
- Abstract: It is commonly believed that consumers make frequent mistakes
when subscribing to telephone calling plans. The fact that consumers show a
strong preference for flat rate options has been frequently interpreted as
evidence of irrational behavior. Such a choice is generally thought not to be
cost minimizing ex-post. My results, obtained using data from the 1986 Kentucky tariff experiment, contradict these views and provide strong
evidence in favor of the rationality of consumers' choices. I find that
expectations regarding future consumption play an important role in the
choice of calling plan. But more importantly, the evidence shows that there
exist important learning effects that induce consumers to switch plans.
Switching occurs in order to minimize the magnitude of monthly bills even in
the short term and in response to very small differences in cost.
- Publication: American Economic Review, 93, 297-310, March 2003.
- JEL: D42,
D82, L96.
- First version: March 2001.
- Final version: May 2003.
- Funding: None.
- Seminars: James L. McCabe
Empirical Micro Workshop at the University of Pennsylvania.
- Conferences: II CEPR Conference on
Empirical Industrial Organization, Lisbon 2000 and the 5th Meeting on
Telecommunications Economics, Madrid June 2001.
- Media Citations: Financial Times, 14-April-2006; Slate, 15-April-2006.
- Noteworthy: Previously circulated as CEPR DP No. 2562.
- Data.
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