Selling to Overcon…dent Consumers

Abstract

Consumers may overestimate the precision of their demand forecasts. This overcon…dence creates an incentive for both monopolists and competitive …rms to oer taris with included quantities at zero marginal cost, followed by steep marginal charges. This matches observed cell- phone service pricing plans in the US and elsewhere. An alternative explanation with common priors can be ruled out in favor of overcon…dence based on observed customer usage patterns for a major US cellular phone service provider. The model can be reinterpreted to explain the use of ‡at rates and late fees in rental markets, and teaser rates on loans. Nevertheless, …rms may bene…t from consumers losing their overcon…dence.

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