Consumer Overconfidence and the Choice of Cell Phone Plans

I use an original and rich data set from a cell phone service provider from Europe to estimate the degree of consumer overcon�dence and its impact on welfare in the market for cell phone services. The menu of tari�s o�ered by the cellular service provider includes both two-part and three-part tari�s which are optimal under di�erent levels of voice minute usage. The observed customer plan choice and voice minute consumption allow me to estimate the degree of overcon�dence about future usage. To separately identify overcon�dence from uncertainty and to account for consumer self selection into cell phone plans, I build a two-stage structural model where a consumer makes his plan choice based on his beliefs about future demand, while the voice minute consumption decision is based on the realization of his demand. The structural model also allows me to estimate the variance of the optimization error which arises from customers not perfectly monitoring their voice minute usage. I estimate that 76 percent of consumers underestimate the variance of their future demand for voice minutes, and, on average, a customer underestimates it by 23 percent. Furthermore, the optimization error term is precisely estimated and accounts for 17 percent of variation in observed voice minute usage not accounted by observable customers' characteristics. I also �nd that elimination of overcon�dence and optimization error leads to 3.06 percent increase in total welfare. Dedication This dissertation is dedicated to my parents, Ljubomir and Dragana, and my grandparents, Ugrin, Radmila, Desimir, and Stamenka, for their love, support, and sacri�ce.

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