DP10861 Loss aversion on the phone

Author(s): Christos D. Genakos, Costas Roumanias, Tommaso Valletti
Publication Date: October 2015
Keyword(s): consumer switching, loss aversion, mobile telephony, risk aversion, tariff plans
JEL(s): D03, D12, D81, L96
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10861

We analyze consumer switching between mobile tariff plans using consumer-level panel data. Consumers receive reminders from a specialist price-comparison website about the precise amount they could save by switching to alternative plans. We find that the effect on switching of being informed about potential savings is positive and significant. Controlling for savings, we also find that the effect of incurring overage payments is also significant and six times larger in magnitude. Paying an amount that exceeds the recurrent monthly fee weighs more on the switching decision than being informed that one can save that same amount by switching to a less inclusive plan, implying that avoidance of losses motivates switching more than the realization of equal-sized gains. We interpret this as evidence of loss aversion. We are also able to weigh how considerations of risk versus loss aversion affect mobile tariff plan choices: we find that a uniform attitude towards risk in both losses and gains has no significant influence on predicting consumers? switching, whereas perceiving potential savings as avoidance of losses, rather than as gains, has a strong and positive effect.