Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

Abstract: We study consumer inertia in the mobile subscription market, focusing on the decision of whether to switch to a competing provider. To identify the extent of inertia, we exploit price changes faced by 270,000 consumers of a large telecom provider. We document that the propensity to switch provider after the price change increases among consumers whose costs decrease with the new prices. Furthermore, we find that the increase is largest right after consumers are informed of the upcoming change—during the two months prior to the tariff change—as opposed to when the price change is implemented. From these findings, we infer what we call a poking effect; the information of an upcoming price change causes consumers to engage in searches for alternative offers, leading to increased switching. We supplement the analysis with a survey and find indications that the poking effect is due to consumer inattention. To separate the effect on attention from the reaction to the actual price change, we estimate a model of consumer choice with limited attention. We find that when consumers are poked, it increases the share of consumers becoming attentive to competing offers. This leads many consumers to switch providers earlier than they would otherwise, explaining why they leave even though their terms with their current company improve.

Keywords: Consumer Inertia; Inattention; Consumer Behavior; Telecom; Churn

JEL-codes: M00

38 pages, November 21, 2018

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