Faculty of Economics and Business Administration Publications Database

Paying Too Much and Being Happy About It: Existence, Causes and Consequences of Tariff-Choice Biases

Lambrecht, Anja
Volume: 43
Number: 2
Pages: 212 - 223
Month: May
ISSN-Print: 0022-2437
Link External Source: Online Version
Year: 2006
Keywords: Pricing; Nonlinear pricing; Flat-rate bias; Pay-per-use bias; Tariff choice; Consumer behaviour; Internet
Abstract: A common assumption underlying the analysis of consumers'' choice between optional tariffs is that consumers choose the tariff that maximizes consumer surplus and, thus, the tariff that leads for a given amount of usage to the lowest billing rate. Yet, there is evidence that many users prefer a flat rate even though their billing rate would be lower on a pay-per-use tariff (flat-rate bias) and some users prefer a pay-per-use tariff even though they would save money on a flat rate (pay-per-use bias). The authors conduct four empirical analyses based on three different data sets. They show that the flat-rate bias is more important and has a greater regularity and time-persistence than the pay-per-use bias. They classify potential causes of the flat-rate bias as insurance effect, taxi meter effect, convenience effect, and overestimation effect and show that the insurance, the taxi meter and the overestimation effect lead to a flat-rate bias. They provide evidence that underestimation of usage is a major cause of the pay-per-use bias. They show that the flat-rate bias does not significantly increase customer churn and thus results in a short- and long-term profit increase. In contrast, the pay-per-use bias largely increases churn so that the additional short-term profit is in the long-term offset by higher churn.