Information Search and Processing Costs: Evidence from Cell Phone Plans in Korea

Abstract

This paper investigates both theoretically and empirically the influence of search and analysis costs of information on consumer's choice of cell phone plans. We assume that choosing optimal cell-phone plans requires consumers to go through a costly process of information search and analysis, which departs from the naive assumption in typical competitive market models.

We show that the existence of search and analysis costs in consumers' search process leads to suboptimal choices of cell phone plans. First, we propose a model where a monopolistic cell-phone service provider can come up with 'standard' plans, thus inducing the consumers with high information costs to choose those plans without further searching of better alternatives and to be locked-in eventually. Second, we empirically show that the consumers with higher information search and analysis costs are more likely to choose the standard plan, which is consistent with the theoretical prediction of the paper.

Further, standard plan subscribing consumers indicate statistically significant difference from the other consumers in various characteristics such as age, attitudes toward the learning of new information, and so on.

Our results imply that learning is such a costly process and, considering the high information costs for most of the consumers, the provision of usage information to consumers is necessary to be delivered in a simplified expression.

Also, considering the consumers' passive attitudes toward usage information seeking, it will be more effective to deliver usage information as directly as possible to consumers rather than to provide tools to help their active search, such as plan comparison websites.

Note: Downloadable document is in Korean.

Keywords: Cell phone plans, Search costs, Suboptimal choice

JEL Classification: L11, L96