An Empirical Analysis of Flat-Rate Preference in Telecommunication and Transportation Services : A Behavioral Economic Approach

Abstract

This paper examines the existence of users' preference for flat rate media access fees and further identifies those factors that influence such preferences. Specifically, we explore consumer addiction to flat-rate pricing plans, defined as “flat-rate preference,” and examine such concepts from the perspective of behavioral economics. This paper applies several important concepts invoked from behavioral economics to provide more reasonable interpretations of consumer preferences for flat-rate pricing plans. Behavioral economics, though difficult to apply empirically, provides deeper insights into consumer behavior since it includes psychological factors which allow for the consideration of irrational choice behaviors. Towards this end, we first test the existence of consumer preferences for flat-rate pricing plans. Then, we investigate the factors that can be used to further understand and explain such preference. More concretely, we examine how fundamental concepts from Prospect Theory such as loss aversion, dependency upon reference points, and the shape of the probability weighting function can explain consumer inclinations towards flat-rate plans. Other fundamental concepts such as mental accounting, ambiguity aversion and cognitive dissonance are also applied to further explain such preferences.JEL Classification: C14, C91, L86, L96

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