Selling to Overcondent Consumers

Consumers may overestimate the precision of their demand forecasts. This overcon…dence creates an incentive for both monopolists and competitive …rms to o¤er tari¤s with included quantities at zero marginal cost, followed by steep marginal charges. This matches observed cellphone 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. A previous version of this paper circulated under the title "Screening Overcon…dent Consumers" (2005). I am very grateful to Jeremy Bulow, Jonathan Levin, and Andrzej Skrzypacz for many valuable discussions of the issues in the paper and to Katja Seim for help and advice especially in obtaining data. For helpful comments and suggestions, I would also like to thank three anonymous referees, Susan Athey, Simon Board, Carlos Corona, Liran Einav, Erik Eyster, Bob Gibbons, Richard Holden, Peter Lorentzen, Greg Rosston, Brian Viard, Bob Wilson, and seminar participants at Stanford, Berkeley, Northwestern, MIT, Princeton, Yale, Columbia, UCLA, Caltech, Harvard, and Penn. I am thankful for …nancial support from the Taube Scholarship Fund Fellowship through a grant to the Stanford Institute for Economic Policy Research, and from the State Farm Companies Foundation Doctoral Award.