A brief review of the article, which is published by Peter D. Lunn. Telecommunications Consumers: A Behavioral Economic Analysis is "a commentary on consumer behavior in modern telecommunications markets, based on advances in behavioral economics. The core argument is that the combination of FBB, PSTN, Mobile and TV properties, which is unique to telecommunications, is likely to foment decision-making biases established by behavioral economics. This central insight is used to address two issues of concern from a pro-consumer perspective: low levels of switching between providers and failure to select optimum tariffs."

1. Financial Economics

2. Index
Introduction
Specific Properties of Market
Decision-making Biases
Key Characteristics of Telecom Markets
Psychological Demands on Consumer Decisions
The Concept of Switching Cost
Willingness to Exchange & the Status Quo
Resistance to Switching
Suboptimal Choice
Empirical Qustions
Conclusions

3. Introduction
This article offers a commentary on consumer behavior in modern
telecommunications markets, based on advances in behavioral
economics. Behavioral economics offers insights into how modern
telecoms consumers make these decisions, and what might be done to
help them.
In theory, the opening up of these markets to competition allows
consumers to be active in choosing the best and lowest cost suppliers,
producing upward pressure on quality, downward pressure on prices
and an overall increase in consumer benefit and economic efficiency.

4. Specific Properties of Market
PSTN
Public Switched Telephone
Network
FBB
Fixed Broadband
Mobil TV
PRODUCTS

5. This combination of properties, which is unique to telecommunications, is
likely to foment decision-making biases established by behavioral
economics. This central insight is used to address two issues of concern
from a pro-consumer perspective: low levels of switching between
providers and failure to select optimum tariffs.
Decision-making Biases
Research in energy markets has revealed large numbers of consumers
failing to switch to lower cost suppliers. In a recent sample of British
consumers, the majority who switched electricity supplier to make savings
failed to select the best available deal, while a substantial minority
actually managed to increase their bills

6. Choosing a new telecommunications service is a decision in which equipment,
associated software, access to a particular network and a tariff structure are all
factors. That is, simultaneous assessments of value are required over what are, in
effect, four distinct products, some of which themselves involve multiple dimensions
of value (reliability, speed, user-friendliness, etc.). The complexity of simultaneous
judgments required is greater still where different services are bundled, e.g., fixed-
hline telephone and broadband internet, or broadband and television.
Key Characteristics of Telecom Markets
1

7. The private value of communication depends on who you communicate with and
why: vital in emergencies; higher if you form a new relationship; lower if you become
too busy; immediately improved by a great new website; dependent on changes to
online service provision and so on. Telecommunications products are enabling
devices and their value is thus not limited to how successfully they perform, but
also to what they enable: access to people, information, entertainment, services and
purchase opportunities.
Key Characteristics of Telecom Markets
2

8. Telecommunications offerings are subject to an extreme pace of technological
advancement. Consumers make decisions in relation to equipment, software and
services they are yet to experience. Size, speed, functionality, reliability and design
are continually changing. Repeat purchase is rare or even impossible due to
obsolescence.
Key Characteristics of Telecom Markets
3

9. Consumers make multiple and varied decisions in the market on a daily or even
hourly basis, requiring trade-offs between immediate costs and benefits and future
ones. Depending on the precise tariff structure, contracts offer consumers the
continual right to consume immediate social contact, information and entertainment,
plus further opportunities to purchase a vast range of everyday goods and services
for delivery.
Key Characteristics of Telecom Markets
4

10. The product combines equipment, software, network and tariff structure, means not only that four
(themselves multi-attribute) products must be simultaneously judged, but also that there may be
very many possible combinations from which to choose.
Psychological Demands on Consumer
Decisions
• To value multi-attribute opportunities and
experiences the product ultimately enables
access to.
• Between offerings, the consumer must decide
how much to spend.
• Rapid technological advancement, means that
even returning consumers lack experience with
aspects of the latest offerings.
• The consumer must also judge how much they
will use the service and hence, depending on
the selected tariff, what the bills will look like.
Whatever approach is chosen, a good
decision demands time-consistent
behavior: choosing the best option for
predicted usage and sticking to that usage.
Yet, empirically, when consumers are asked
to trade-off immediate benefits and costs
against future ones, behavior typically
implies time inconsistent preferences.

11. Switching costs were identified with time, effort or price and also
perceptions of such costs.
The Concept of Switching Cost
Which covered the time
and effort required to
complete the
administrative process.
Imposed by firms, such
as discounts for loyalty.
Which entailed the time and effort required to
research other products and to learn to exploit
brand-specific attributes.

12. Many consumers require the prospect of large gains before they will
switch and many stick with providers they might not choose were they to
enter the market afresh. Lower switching is implied in markets where
consumers are more uncertain about the relative value of offerings.
Willingness
to Exchange & the Status Quo
Experiments then confirmed the generality of the effect. For instance, if
opinion survey respondents are asked to state which of two options is
best, simply informing them as to which is the current option biases
responses in that direction.

13. Resistance to Switching
Ambiguity Aversion
It is well-known that we tend to be risk-averse, perhaps less well-known is that we are more
averse to certain kinds of uncertainty.
Procrastination
We are more willing to give up time in the future to do effortful tasks than we are to give
up our precious time in the present.
Inertia
In the absence of a salient signal of the benefits, we simply do not consider switching. Thus,
even cons. who believe they would gain, or would believe so if they paid the matter attention,
may fail to get around to switching.

14. Suboptimal Choice
Self-Control
• Self-control problems are likely to be compounded by online content that may be partly
addictive, such as gambling opportunities, gaming, social networking, shopping or
pornography.
Overconfida
nce
• Overconfidence offers an alternative explanation for the high proportion of consumers on
tariffs that do not minimize their bill.
Miscalibrati
on
• We think our assessments are more accurate than they in fact are, so that the probability of
outcomes far removed from our assessments is underestimated.
Ultimate usage is determined by the cumulative effect of very many separate decisions about whether to make a
call, send a text, read a blog, watch a video stream, play a game and so on.

15. Empirical Qustions
How much surplus
are consumers
sacrificing by not
switching to lower
cost providers over
the medium to
long term?
How well-founded
is consumers'
reluctance to
switch?

16. Conclusions
The requirements for consumers to make simultaneous judgments
across multiple dimensions of value, to value hugely varied experiences,
to understand the benefits of new technology, and to make many time-
consistent decisions per day, make telecommunications markets unique.
Digital communications technology is providing us with ever more
entertainment and helping us to achieve routine tasks more easily. It can
also help us to make better decisions about which communications
services to use and how much to pay for them.

17. Thanks.