Selling to Overconfident Consumers
Open accessAbstract
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 cellular phone service pricing plans in the United States 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. (JEL D12, L11, L96)
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Many consumers choose suboptimal contracts given their expected usage patterns, leading to rents for firms.
“For example, many consumers choose suboptimal contracts given their expected usage patterns, leading to rents for firms (e.g., see Grubb (2009) on phone contracts).”
From The Coasean Singularity? Demand, Supply, and Market Design with AI Agents (2025) · cites this paper as Grubb (2009)
The web appendix’s Additional information (Table 6; no page listed) reports that many phone-plan customers had a cheaper alternative given their observed usage, while A Option Pricing Intuition (no page listed) explains how firms can profit from consumers’ mistaken beliefs about usage. The table measures ex post plan mistakes, however, not whether the contracts were suboptimal given customers’ expected usage patterns. (LLM, conf=0.82)
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Mussa, M., & Rosen, S. (1978) · Journal of Economic Theory · doi:10.1016/0022-0531(78)90085-6 · Cited by 3,306 · see citing works
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Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock
Grubb, M. D., & Osborne, M. (2015) · American Economic Review · doi:10.1257/aer.20120283 · Cited by 268 · see citing works
Self-citationThe Coasean Singularity? Demand, Supply, and Market Design with AI Agents
Shahidi, P., Rusak, G., Manning, B., Fradkin, A., & Horton, J. (2025) · doi:10.3386/w34468 · Cited by 18 · see citing works
- Authors
- Grubb, M. D.
- Affiliations
- Massachusetts Institute of Technology (US)
- Corresponding author
- Grubb, Michael D.
- ORCID
- Grubb, Michael D.
- Venue
- American Economic Review
- Publisher
- American Economic Association
- Published
- 2009-12-01
- Volume
- 99
- Issue
- 5
- Pages
- 1770-1807
- ISSN
- 0002-8282 (ISSN-L)
- OpenAlex
- W3121915579
- Cited by
- 316
- References
- 1
- Citations by year
- 2026: 8 · 2025: 7 · 2024: 42 · 2023: 14 · 2022: 16 · 2021: 11 · 2020: 12 · 2019: 16 · 2018: 22 · 2017: 21 · 2016: 23 · 2015: 28 · 2014: 12 · 2013: 21 · 2012: 21
- FWCI
- 54.49
- Type
- journal article
- Language
- en
- Open access
- green
- www.aeaweb.org
- Locations
- American Economic Review (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- DSpace@MIT (Massachusetts Institute of Technology) (submittedVersion, cc-by-nc)
- Topics
- Social Sciences › Business, Management and Accounting › Marketing › Consumer Market Behavior and Pricing
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Merger and Competition Analysis
- Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
- Keywords
- demand forecasting, pricing plans, marginal pricing, monopoly pricing, competitive pricing, common prior, late fees, rental market, loan pricing
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