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Dynamic nonlinear pricing: Biased expectations, inattention, and bill shock

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  • Grubb, Michael D.

Abstract

Recent research highlights the importance of biased expectations and inattention for nonlinear pricing in dynamic environments. Findings are: (1) Three-part tariffs, such as cellular service contracts, exploit consumer overconfidence. (2) Surprise penalty fees may be used to further exploit biased beliefs or alternatively to price discriminate more efficiently whenever consumers are inattentive. (3) Implementing the recent bill-shock agreement between cellular carriers and the FCC is predicted to harm rather than help consumers when endogenous price changes are taken into account.

Suggested Citation

  • Grubb, Michael D., 2012. "Dynamic nonlinear pricing: Biased expectations, inattention, and bill shock," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 287-290.
    • Handle: RePEc:eee:indorg:v:30:y:2012:i:3:p:287-290
    DOI: 10.1016/j.ijindorg.2011.12.007
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    References listed on IDEAS

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    1. George Loewenstein & Ted O'Donoghue & Matthew Rabin, 2003. "Projection Bias in Predicting Future Utility," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1209-1248.
    2. Pascal Courty & Li Hao, 2000. "Sequential Screening," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(4), pages 697-717.
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    7. Michael D. Grubb, 2009. "Selling to Overconfident Consumers," American Economic Review, American Economic Association, vol. 99(5), pages 1770-1807, December.
    8. Yong Chao, 2013. "Strategic Effects Of Three‐Part Tariffs Under Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54, pages 977-1015, August.
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    Cited by:

    1. McGowan, Féidhlim, 2018. "The roaming regulation and the case for applying behavioural industrial organisation to EU competition policy," Papers WP598, Economic and Social Research Institute (ESRI).
    2. Charles Angelucci & Julia Cagé, 2019. "Newspapers in Times of Low Advertising Revenues," American Economic Journal: Microeconomics, American Economic Association, vol. 11(3), pages 319-364, August.
    3. Amanda Starc & Robert J. Town, 2015. "Externalities and Benefit Design in Health Insurance," NBER Working Papers 21783, National Bureau of Economic Research, Inc.
    4. Preyas S. Desai & Devavrat Purohit & Bo Zhou, 2018. "Allowing Consumers to Bundle Themselves: The Profitability of Family Plans," Marketing Science, INFORMS, vol. 37(6), pages 953-969, November.
    5. Catherine Hausman, 2019. "Shock Value: Bill Smoothing and Energy Price Pass‐Through," Journal of Industrial Economics, Wiley Blackwell, vol. 67(2), pages 242-278, June.
    6. Florian Heiss & Daniel McFadden & Joachim Winter & Amelie Wuppermann & Bo Zhou, 2016. "Inattention and Switching Costs as Sources of Inertia in Medicare Part D," NBER Working Papers 22765, National Bureau of Economic Research, Inc.
    7. Charles Angelucci & Julia Cage & Romain de Nijs, 2013. "Price Discrimination in a Two-Sided Market: Theory and Evidence from the Newspaper Industry," Working Papers 13-13, NET Institute.
    8. repec:hal:spmain:info:hdl:2441/26t617gatp86qree1dejcpchbr is not listed on IDEAS
    9. Itai Ater & Vardit Landsman, 2013. "Do Customers Learn from Experience? Evidence from Retail Banking," Management Science, INFORMS, vol. 59(9), pages 2019-2035, September.
    10. repec:spo:wpmain:info:hdl:2441/26t617gatp86qree1dejcpchbr is not listed on IDEAS

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    More about this item

    Keywords

    Nonlinear pricing; Dynamic; Inattention; Overconfidence; Bill shock; Cellular;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection

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