Inattention in Contract Markets: Evidence from a Consolidation of Options in Telecom

Abstract

We study customer inattention by utilizing a notification about a future price change in the mobile subscription market. With detailed customer-level data from a large telecom operator, together with data on prices and contracts offered by competitors, we document that the notification causes an increase in customer attention, which triggers search, plan switching, and churn. In particular, we show that the monthly propensity to churn increases by 60% (from 1% to 1.6%) among customers whose costs would decrease with the new prices. We also document an increase in churn directly after the notification, not at the time of the future price change, and argue that this timing pattern is evidence of sophisticated inattention: customers take immediate action to mitigate the impact of their own future inertia. We supplement the analysis with a survey and find supporting evidence for the important role of inattention in determining how consumers adapt to changes in the market. This paper was accepted by Eric Anderson, marketing.