Consumer inertia, choice dependence and learning from experience in a repeated decision problem

Understanding when and how individuals think about real-life problems is a central question in economics. This paper studies the role of inertia (inattention), state dependence and learning. The natural setting is the Kentucky tariff experiment when optional measured tariffs for local telephone calls were introduced. We find that consumers tend to align correctly their choices of tariff and telephone usage levels. Despite low potential savings, mistakes are not permanent as individuals actively engage in tariff switching in order to reduce the monthly cost of telephone services. Ignoring unobservable heterogeneity and the endogeneity of past choices would have reversed these results.