Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/rco/dpaper/154.html
   My bibliography  Save this paper

An Experimental Analysis of Overconfidence in Tariff Choice

Author

Listed:
  • Dowling, Katharina

    (LMU Munich)

  • Spann, Martin

    (LMU Munich)

  • Stich, Lucas

    (LMU Munich)

Abstract
Digitalization has changed existing business models and enabled new ones. This development has been accompanied by the emergence of new pricing options and the possibility of applying established pricing models in new domains. Today, consumers can, for example, pay for accessing a product instead of buying it. Within such sharing services, consumers can usually choose between a flat-rate and a pay-per-use option. Prior work demonstrated that consumers\' tariff choices are often systematically biased. Overconfidence was identified as one of the key drivers. Yet, prior research is non-experimental and focused on the so-called flat-rate bias. By contrast, we examine the effects of overconfidence on tariff choice experimentally. We show that overconfident consumers overestimate their ability to predict their future usage, which leads them to underestimate their actual usage, and eventually leads them to choose a pay-per-use (vs. a flat-rate) option more frequently. We discuss theoretical and managerial implications.

Suggested Citation

  • Dowling, Katharina & Spann, Martin & Stich, Lucas, 2019. "An Experimental Analysis of Overconfidence in Tariff Choice," Rationality and Competition Discussion Paper Series 154, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:154
    as

    Download full text from publisher

    File URL: https://rationality-and-competition.de/wp-content/uploads/discussion_paper/154.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    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. Rabin, Matthew, 2002. "A perspective on psychology and economics," European Economic Review, Elsevier, vol. 46(4-5), pages 657-685, May.
    3. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Jürgen Schupp & Gert G. Wagner, 2011. "Individual Risk Attitudes: Measurement, Determinants, And Behavioral Consequences," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 522-550, June.
    4. Yufei Ren & Rachel Croson, 2013. "Overconfidence in Newsvendor Orders: An Experimental Study," Management Science, INFORMS, vol. 59(11), pages 2502-2517, November.
    5. Dargnies, Marie-Pierre & Hakimov, Rustamdjan & Kübler, Dorothea, 2019. "Self-Confidence and Unraveling in Matching Markets," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 65(12), pages 5603-5618.
    6. Markus Glaser & Martin Weber, 2007. "Overconfidence and trading volume," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 32(1), pages 1-36, June.
    7. Fabian Herweg & Konrad Mierendorff, 2013. "Uncertain Demand, Consumer Loss Aversion, And Flat-Rate Tariffs," Journal of the European Economic Association, European Economic Association, vol. 11(2), pages 399-432, April.
    8. Sujoy Chakravarty & Glenn W. Harrison & Ernan E. Haruvy & E. Elisabet Rutström, 2011. "Are You Risk Averse over Other People's Money?," Southern Economic Journal, John Wiley & Sons, vol. 77(4), pages 901-913, April.
    9. Johannes Spinnewijn, 2015. "Unemployed But Optimistic: Optimal Insurance Design With Biased Beliefs," Journal of the European Economic Association, European Economic Association, vol. 13(1), pages 130-167, February.
    10. Simon Gächter & Lingbo Huang & Martin Sefton, 2016. "Combining “real effort” with induced effort costs: the ball-catching task," Experimental Economics, Springer;Economic Science Association, vol. 19(4), pages 687-712, December.
    11. Ulrike Malmendier & Geoffrey Tate, 2015. "Behavioral CEOs: The Role of Managerial Overconfidence," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 37-60, Fall.
    12. Katharina Dowling & Daniel Guhl & Daniel Klapper & Martin Spann & Lucas Stich & Narine Yegoryan, 2020. "Behavioral biases in marketing," Journal of the Academy of Marketing Science, Springer, vol. 48(3), pages 449-477, May.
    13. Michael D. Grubb & Matthew Osborne, 2015. "Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock," American Economic Review, American Economic Association, vol. 105(1), pages 234-271, January.
    14. Michael D. Grubb, 2009. "Selling to Overconfident Consumers," American Economic Review, American Economic Association, vol. 99(5), pages 1770-1807, December.
    15. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-372, June.
    16. Michael D. Grubb, 2015. "Consumer Inattention and Bill-Shock Regulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(1), pages 219-257.
    17. Daylian M. Cain & Don A. Moore & Uriel Haran, 2015. "Making sense of overconfidence in market entry," Strategic Management Journal, Wiley Blackwell, vol. 36(1), pages 1-18, January.
    18. Jan Becker & Martin Spann & Timo Schulze, 2015. "Implications of minimum contract durations on customer retention," Marketing Letters, Springer, vol. 26(4), pages 579-592, December.
    19. Muriel Niederle & Lise Vesterlund, 2007. "Do Women Shy Away From Competition? Do Men Compete Too Much?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(3), pages 1067-1101.
    20. Kenneth E. Train & Daniel L. McFadden & Moshe Ben-Akiva, 1987. "The Demand for Local Telephone Service: A Fully Discrete Model of Residential Calling Patterns and Service Choices," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 109-123, Spring.
    21. Novemsky, Nathan & Schweitzer, Maurice E., 2004. "What makes negotiators happy? The differential effects of internal and external social comparisons on negotiator satisfaction," Organizational Behavior and Human Decision Processes, Elsevier, vol. 95(2), pages 186-197, November.
    22. Raghuram Iyengar & Kamel Jedidi & Skander Essegaier & Peter J. Danaher, 2011. "The Impact of Tariff Structure on Customer Retention, Usage, and Profitability of Access Services," Marketing Science, INFORMS, vol. 30(5), pages 820-836, September.
    23. Min Ding & Rajdeep Grewal & John Liechty, 2005. "Incentive-aligned conjoint analysis," Framed Field Experiments 00139, The Field Experiments Website.
    24. Peter C. Reiss, 2011. "Structural Workshop Paper --Descriptive, Structural, and Experimental Empirical Methods in Marketing Research," Marketing Science, INFORMS, vol. 30(6), pages 950-964, November.
    25. Stefano DellaVigna & Ulrike Malmendier, 2006. "Paying Not to Go to the Gym," American Economic Review, American Economic Association, vol. 96(3), pages 694-719, June.
    26. Stephen Leider & Özge Şahin, 2014. "Contracts, Biases, and Consumption of Access Services," Management Science, INFORMS, vol. 60(9), pages 2198-2222, September.
    27. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
    28. Mitchell Hoffman & Stephen V. Burks, 2020. "Worker overconfidence: Field evidence and implications for employee turnover and firm profits," Quantitative Economics, Econometric Society, vol. 11(1), pages 315-348, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jennifer Kunz & Lara Sonnenholzner, 2023. "Managerial overconfidence: promoter of or obstacle to organizational resilience?," Review of Managerial Science, Springer, vol. 17(1), pages 67-128, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dowling, Katharina & Manchanda, Puneet & Spann, Martin, 2021. "The existence and persistence of the pay-per-use bias in car sharing services," International Journal of Research in Marketing, Elsevier, vol. 38(2), pages 329-342.
    2. Michael Grubb, 2015. "Behavioral Consumers in Industrial Organization: An Overview," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 247-258, November.
    3. Michael D. Grubb, 2015. "Behavioral Consumers in Industrial Organization," Boston College Working Papers in Economics 879, Boston College Department of Economics.
    4. Maria De Paola & Francesca Gioia & Vincenzo Scoppa, 2013. "Overconfidence, Omens And Emotions: Results From A Field Experiment," Working Papers 201303, Università della Calabria, Dipartimento di Economia, Statistica e Finanza "Giovanni Anania" - DESF.
    5. Katharina Dowling & Daniel Guhl & Daniel Klapper & Martin Spann & Lucas Stich & Narine Yegoryan, 2020. "Behavioral biases in marketing," Journal of the Academy of Marketing Science, Springer, vol. 48(3), pages 449-477, May.
    6. Ian Larkin & Stephen Leider, 2012. "Incentive Schemes, Sorting, and Behavioral Biases of Employees: Experimental Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 184-214, May.
    7. De Paola, Maria & Gioia, Francesca & Scoppa, Vincenzo, 2014. "Overconfidence, omens and gender heterogeneity: Results from a field experiment," Journal of Economic Psychology, Elsevier, vol. 45(C), pages 237-252.
    8. Itai Ater & Vardit Landsman, 2013. "Do Customers Learn from Experience? Evidence from Retail Banking," Management Science, INFORMS, vol. 59(9), pages 2019-2035, September.
    9. Stephen Leider & Özge Şahin, 2014. "Contracts, Biases, and Consumption of Access Services," Management Science, INFORMS, vol. 60(9), pages 2198-2222, September.
    10. Jin, Haofeng & Lu, Zhentong & Huang, Liqiang & Dou, Junsheng, 2021. "Not too much nor too little: Salience bias in mobile plan choices," Telecommunications Policy, Elsevier, vol. 45(4).
    11. Jin, Haofeng, 2022. "The effect of overspending on tariff choices and customer churn: Evidence from mobile plan choices," Journal of Retailing and Consumer Services, Elsevier, vol. 66(C).
    12. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-372, June.
    13. Arni, Patrick & Dragone, Davide & Goette, Lorenz & Ziebarth, Nicolas R., 2021. "Biased health perceptions and risky health behaviors—Theory and evidence," Journal of Health Economics, Elsevier, vol. 76(C).
    14. Michael Grubb, 2015. "Failing to Choose the Best Price: Theory, Evidence, and Policy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 303-340, November.
    15. Michael D. Grubb, 2015. "Overconfident Consumers in the Marketplace," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 9-36, Fall.
    16. Dohmen, Thomas, 2014. "Behavioral labor economics: Advances and future directions," Labour Economics, Elsevier, vol. 30(C), pages 71-85.
    17. Xavier Gabaix, 2017. "Behavioral Inattention," NBER Working Papers 24096, National Bureau of Economic Research, Inc.
    18. Ulrike Malmendier, 2018. "Behavioral Corporate Finance," NBER Working Papers 25162, National Bureau of Economic Research, Inc.
    19. Kai Barron & Christina Gravert, 2022. "Confidence and Career Choices: An Experiment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 124(1), pages 35-68, January.
    20. Francesco Angelini & Massimiliano Castellani & Lorenzo Zirulia, 2022. "Overconfidence in the art market: a bargaining pricing model with asymmetric disinformation," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 39(3), pages 961-988, October.

    More about this item

    Keywords

    overconfidence; tariff choice; pay-per-use; flat-rate; experiment;
    All these keywords.

    JEL classification:

    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rco:dpaper:154. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Viviana Lalli (email available below). General contact details of provider: https://rationality-and-competition.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.