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)

As of April 2013, the FCC's recent bill-shock agreement with cellular carriers requires consumers be notified when exceeding usage allowances. Will the agreement help or hurt consumers?We estimate a model of consumer plan choice, usage, and learning using a panel of cellular bills would have little to no effect. * A previous version circulated under the title "Cellular Service Demand: Tariff Choice, Usage Uncertainty, Biased Beliefs, and Learning". We thank Parker Sheppard and Mengjie Ding for research assistance and Katja Seim, Panle Jia, Eugenio Miravete, Catherine Tucker, Greg Lewis, Chris Knittel, Ron Goettler, Tavneet Suri, and S. Sriram for careful reading and feedback on early drafts. We also thank Ted O'Donoghue and seminar audiences at Duke, Cornell, Chicago, and Rochester for useful feedback. Finally we thank three anonymous referees for many helpful suggestions.

When consumers sign contracts, expectations about future usage of the product or service matter. For instance, the value provided by car insurance depends on how likely a consumer believes she is to file a claim; the value provided by a gym membership depends on how often a consumer anticipates going to the gym; and the value provided by a cellular phone contract depends on how many gigabytes of data a consumer anticipates using. The standard modeling paradigm makes the expedient assumption that consumers have rational expectations. Imposing rational expectations drastically simplifies models and eliminates the need to directly measure beliefs as they coincide with the distribution of observed outcomes. Yet a large literature shows that consumer beliefs often deviate substantially from rational expectations in systematic ways. This has important consequences for contract design, firm profits, consumer welfare, and public policy.The term overconfidence is used broadly in the psychology literature, referring to both overoptimism and overprecision. Overoptimistic individuals overestimate their own abilities or prospects, either in absolute terms or in comparison to others. In contrast, overprecise individuals place overly narrow confidence intervals around forecasts, thereby underestimating uncertainty. These biases can lead consumers to misforecast their future product usage, or to overestimate their abilities to navigate contract terms. In consequence, consumer overconfidence causes consumers

Both the "law of one price" and Bertrand's (1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In practice, consumers often fail to choose the best price because they search too little, become confused comparing prices, and then show excessive inertia through too little switching away from past choices or default options. This is particularly true when price is a vector rather than a scalar, and consumers have limited experience in the relevant market. All three mistakes may contribute to positive markups that fail to diminish as the number of competing sellers increases. Firms may have an incentive to exacerbate these problems by obfuscating prices, thereby using complexity to make price comparisons difficult and soften competition. Possible regulatory interventions include simplifying the choice environment, for instance by restricting price to be a scalar, advising consumers of their expected costs under each option, or choosing on behalf of consumers. * Boston College, michael.grubb@bc.edu, https://www2.bc.edu/michael-grubb/. I am grateful to Mark Armstrong, Ben Handel, and Rani Spiegler for careful reading and many helpful comments on an earlier draft. I also thank Vera Sharunova for her excellent research assistance.

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