Biased choice of a mobile telephony tariff type:: Exploring usage boundary perceptions as a cognitive cause in choosing between a use-based or a flat rate plan

Abstract

Most mobile network operators provide newly acquired or existing customers with the possibility to choose between a monthly flat rate for unlimited voice calls and pay-per-minute price schemes. Consumers who maximize their utility should select the tariff type that leads to the lowest invoice amount given their anticipated service usage volume. However, previous research looking at users of fixed network telephony, broadband Internet access and other services suggests that a significant share of consumers prefers a flat rate to use-dependent price plans even though their invoice will be higher. One cognitive explanation for such biased choices is that consumers consider the ratio of the likelihood of calling enough to justify a flat rate to the probability of not calling enough to save money with a fixed price (= “ratio rule”) when choosing between the two tariff types. In this assessment they overestimate the first likelihood in proportion to the second one. Drawing on a sample of 203 mobile telephony customers in Germany the present study shows that mobile users are biased in favor of a flat rate because they overestimate their future call usage and behave in line with the “ratio rule” when choosing a tariff type. Correlates of cognitively biased tariff choices are explored. With regard to pricing practices it is concluded that managers should not follow the temptation to exploit the overestimation bias in designing pricing and advertising policies pushing customers into fixed price schemes, which do not fit their actual calling patterns.