The role of self selection, usage uncertainty and learning in the demand for local telephone service

Abstract

Telephone services are often characterized by the presence of ‘fixed’ plans, involving only a fixed monthly fee, as well as ‘measured’ plans, with both fixed fees and per-unit charges for usage. Consumers are faced with the decisions of which plan to choose and how much to use the phone and these decisions are not, in general, independent. Due to the presence of a time lag between plan choice and usage decisions, consumers are uncertain about usage at the plan-choice stage. We develop a structural discrete/continuous model of plan choice and usage decisions of consumers that accounts for such uncertainty. Prior research has also found that consumers switch less often from fixed plans to measured plans to gain from potential savings than vice versa. Consumer uncertainty regarding their mean usage levels and different rates of learning by consumers in the two plans is a potential explanation for this phenomenon. We extend our discrete/continuous model to account for consumer learning about their mean usage and estimate different rates of learning for the two types of plans.