Choosing the Wrong Calling Plan? Ignorance and Learning

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. JEL: D42, D82, L96.

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