The role of self selection, usage uncertainty and learning in the demand for local telephone service

Abstract

Telephone services are often characterized by the presence of ‘fixed’ plans, involving only a fixed monthly fee, as well as ‘measured’ plans, with both fixed fees and per-unit charges for usage. Consumers are faced with the decisions of which plan to choose and how much to use the phone and these decisions are not, in general, independent. Due to the presence of a time lag between plan choice and usage decisions, consumers are uncertain about usage at the plan-choice stage. We develop a structural discrete/continuous model of plan choice and usage decisions of consumers that accounts for such uncertainty. Prior research has also found that consumers switch less often from fixed plans to measured plans to gain from potential savings than vice versa. Consumer uncertainty regarding their mean usage levels and different rates of learning by consumers in the two plans is a potential explanation for this phenomenon. We extend our discrete/continuous model to account for consumer learning about their mean usage and estimate different rates of learning for the two types of plans. We estimate our model using data from the 1986 Kentucky local telephone tariff experiment. Even in the absence of any price variation over time, we are able to measure the price elasticities both of usage and of choice of plan. Using our parameter estimates, we simulate the effects of the introduction of a metered plan in a market with only a fixed plan and vice versa, on both firm revenues and consumer surplus. We also find that consumers learn very rapidly if they are on the measured plan but learn very slowly when they are on the fixed plan. We investigate an alternative assumption on the nature of the learning process in which only consumers in the measured plan have an opportunity to learn. We find that our empirical results are robust to this change of specification. We conduct counterfactual simulations to simulate enhanced calling plans from the firm and consumer points of view. Additional simulations to measure the value of information in this category are also carried out. We compute the value of both complete information, where the entire uncertainty about future usage is resolved, as well as that of limited information, where the consumer's uncertainty about mean usage is resolved, but the uncertainty about specific month-to-month usage remains. We find that the value of information is modest. We also find that a large proportion of the value of information is that about the mean usage, with the value of the information about a specific month's usage being relatively small. Copyright Springer Science+Business Media, LLC 2007Self-selection, Uncertainty, Value of information, Discrete/continuous models, Learning models, Telecommunications, Optional calling plans,

Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock

“…Our results are consistent with a related sequence of papers about Kentucky's 1986 local telephone tariff experiment (Miravete 2002, Miravete 2003, Miravete 2005, Narayanan, Chintagunta and Miravete 2007. First, although the standard model of consumer choice does well at explaining behavior in the Kentucky experiment, our estimate that consumers underestimate their average taste for calling is consistent with evidence in Miravete (2003) which documents that on average all consumers who chose a small metered plan would have saved money on a larger flat rate plan.…”

“…Narayanan et al (2007) estimate that consumers in the Kentucky experiment learn to switch up from overuse faster than they learn to switch down from underuse. In the context of retail banking, Ater and Landsman's (2013) results suggest that the asymmetry could be large enough that banking customers' tendency too choose overly large plans grows overtime through switching.…”

Quantifying the Impacts of Digital Rights Management and E-Book Pricing on the E-Book Reader Market

“…7 A number of authors extended this framework to the presence of uncertainty on future consumption (e.g., Miravete (2003); Narayanan, Chintagunta, and Miravete (2007); and Iyengar, Jedidi, and Kohli (2008)). As our model does not feature a multi-part tariff structure, we assume for simplicity that consumers can perfectly predict their future usage.…”

Consumer behavior towards on-net/off-net price differentiation

“…In fact, for telecommunications services there is a long array of evidence by now, starting with Train, McFadden & Ben-Akiva (1987), which suggests that consumers su¤er from a ‡at-rate bias, i.e., consumers tend to prefer ‡at rates even in situations were measured rates are clearly less costly (also see Kling & Miravete (2002Miravete ( , 2003 who …nds that consumers correct their eventual mistakes so that any ‡at-rate bias vanishes once one allows for consumer learning (also see Narayanan et al, 2007).…”