Choosing the Wrong Calling Plan? Ignorance and Learning

When a firm offers several tariff options to its customers, the possibility arises that they will make an ex post mistake in tariff choice. This occurs since consumers cannot commit to a certain purchase level at the time they subscribe to the service option and, thus, they might find out later that a different choice of tariff could have resulted in a lower payment for their actual level of consumption. This is a common feature of increasingly important subscriptions markets, in which buyers and sellers maintain long-term, nonanonymous relations and where learning induces interesting dynamics. On the one hand, buyers may learn their taste over time, thus making the right choice as times goes by; on the other hand, the seller may design options to identify the “type” of each buyer and, if possible, to extract a higher proportion of their consumer surplus by offering tariff options that are better tailored to the profile of the consumer. This paper focuses on the first type of learning. In turn I document buyer behavior in a subscriptions market using data from a tariff experiment run by South Central Bell (SCB) in Kentucky during the second half of 1986. The most frequently studied case of subscriptions markets is the choice among Optional Calling Plans (OCPs) in the telephone industry. This paper shows that, contrary to the conven-