The Freedom Bias: Empirical Evidence for a Neglected Tariff-Choice Anomaly

Due to an increasing convergence in quality, providers of electronic services (e.g., telecommunication and internet services) are relatively limited in their possibilities to differentiate from each other. Therefore, competition in these branches is mainly influenced by the providers’ pricing policy in terms of tariff structures. Traditionally, the offered tariffs differ with regard to the specifications of monthly fixed fee, variable usage price per unit, and included monthly volume. However, during the last years, providers have increasingly offered menus of tariff options with varying contract durations. As these tariffs usually provide discounts depending on the length of commitment, individuals – when tempting to maximize consumer surplus – have not only to account for their monthly usage but also for the expected usage period to minimize their total costs and make a rational tariff choice. Nevertheless, research on tariff-choice anomalies indicates that people often fail to correctly estimate their usage patterns with the result of a less than optimal choice (e.g., Kling and Van der Ploeg 1990; Lambrecht and Skiera 2006; Train, McFadden, and Ben-Akiva 1987). Despite the wide range of findings regarding existence, causes, and consequences of biased choices in favor of flat-rate or pay-per-use tariffs, research on possible additional tariff-choice biases lacks. Thus, the purpose of this research is to introduce a novel bias in the tariff choice context, namely the freedom bias, which is observable if people prefer a short-term contract although they would be better off choosing a long-term agreement.