Consumer Perception of Mobile Telephony Tariffs
with Cost Caps
Jan Krämer
Karlsruhe Institute of Technology
Karlsruhe, Germany
Email: kraemer@kit.edu
Abstract—In this article we provide a seminal academic investi-
gation of mobile telephony consumers’ perception of the recently
introduced cost cap tariff in comparison to corresponding pay-
per-use and flatrate calling plans. Previous studies have identified
several psychological effects through which consumers are be-
lieved to be biased towards flatrate plans. However, flatrate plans
also limit customers’ tariff flexibility in months of low usage.
Cost cap tariffs are a hybrid between pay-per-use and flatrate
plans and can offer cost insurance while maintaining flexibility.
In particular, we provide evidence from a survey among 214
German university students that flexibility, cost insurance and
the so-called taximeter effect are the main drivers behind cost
cap tariff choice. Furthermore, we show that the insurance and
taximeter effects are distinct if evaluated within a flatrate or
cost cap tariff framework. Finally, based on our results we also
comment on the profitability of cost cap plans from a strategic
management perspective.
I. I NTRODUCTION
Competition in the mobile telephony market is fierce and
the scope for product differentiation is limited - a combination
that leads mobile telephony providers to engage in price
differentiation instead. Indeed, the actual extend of price
differentiation in the market is striking and customers are faced
with a multitude of different tariff types [1]–[3].
Traditionally, mobile telephony providers have only offered
two-part tariffs, which consist of fixed monthly fee and a
usage-based component [4]. Two-part tariffs have a long
tradition in telephony [5]. Their popularity stems from the fact
a large portion of the provider’s costs are fixed costs related
to the build up, maintenance and operation of the network
infrastructure, which can be recovered by the fixed component
of the two-part tariff [6]. On the contrary, the marginal
costs of calling, which are constituted through switching or
interconnection fees, for example, are relatively small and
can be recovered by the variable component of the two-part
tariff. In fact, if the telephony provider holds a monopoly,
which has been the case for the fixed-line providers for most
of the twentieth century, two-part tariffs can even achieve to
extract customer rent completely, comparably to perfect price
discrimination [7].
However, in the mobile telephony market, which has been
liberalized much earlier than the fixed telephony market,
actual infrastructure-based competition has created a very
competitive market environment. In an effort to differentiate
their service offering, providers have experimented with new
978-1-4244-7986-3/10/$26.00 ©2010 IEEE
Lukas Wiewiorra
Karlsruhe Institute of Technology
Karlsruhe, Germany
Email: wiewiorra@kit.edu
and innovative tariff structures to the extend that the mobile
telephony market is flooded with a seemingly endless variety
of voice telephony tariffs today. Besides the classical two-part
tariff, the tariff portfolio ranges from three-part tariffs that
include a usage allowance or minimum turnover requirements
to one-part tariffs, i.e. pure pay-per-use or flatrates tariffs.
In this paper we highlight the innovative cost cap tariff
which has been introduced to the German mobile market in
2009 by o2 (Telefonica).1 The cost cap tariff is a new type of
two-part tariff that constitutes a hybrid between a pay-per-use
and a flatrate tariff. It is a pure pay-per-use tariff until the
total costs exceed a predefined cost cap, at which the tariff
effectively becomes a flatrate. o2 claims that the cost cap tariff
is a great success and has significantly contributed to attracting
new customers [8].
In this article we provide a seminal academic investigation
of mobile telephony consumer’s perception of cost cap tariffs
based on a survey among 214 German university students. In
particular, it seems obvious that consumers will perceive the
cost cap tariff as weakly dominant over both the pay-per-use
tariff (because it offers a cost insurance in months of high
usage) as well as the flatrate plan (because it offers flexibility
in months of low usage) if the cost cap tariff offers the same
per-minute prices as a pay-per-use tariff and if the cost cap is
set at the price of a corresponding flatrate plan. On the other
hand, it is questionable to which degree customers of pay-
per-use plans would in fact accept a higher per-minute price
under a cost cap tariff in order to be insured against high
monthly invoices.2 Likewise, previous studies (e.g. [9]–[14])
have provided strong empirical evidence that customers have a
bias towards flatrate plans due to psychological reasons. In the
following we will also investigate to what extend the cost cap
tariff is also capable to benefit from these psychological effects
compared to pure flatrate tariffs while additionally capturing
those customers that have a strong desire for flexible pay-per-
use tariffs.
The remainder of this article is structured as follows: In
Section II we introduce the psychological effects that have
1 The tariff, which is called “o2o”, has officially been released on May 5,
2009.
2 In the o2o cost cap tariff customers pay 15 Euro cents per minute, while
comparable pay-per-use plans are currently available from as low as 7.5 cents
per minute.
been identified as cognitive causes of a flatrate bias and discuss
them in the context of cost cap tariffs. Section III derives our
research questions and IV presents the set up and content of
the survey. In Section V, finally, we will present and discuss
the results of our statistical analysis and conclude in Section
VI by commenting on the results with respect to customers’
perception of cost cap tariffs.
II. R EASONS FOR B IASED TARIFF C HOICE
Economic theory assumes that consumers maximize their
utility when selecting a mobile tariff, such that the chosen
calling plan should (on average) lead to the lowest possi-
ble telephone bill, given correct anticipation of the average
usage. However, several studies (e.g. [12], [14]–[16]) have
provided strong evidence that customers’ actual tariff choice
may deviate from the economic prediction due to motivational,
psychological or cognitive causes that lie outside of the stan-
dard economic framework of fully rational market participants
with perfect foresight. The most prominent example of such
systematic deviations is the the so-called flatrate bias, which
has been shown in context with all-you-can-eat buffets [17],
gym subscriptions [9], Internet access plans [10]–[12] and
mobile calling plans [13], [14]. The flatrate bias asserts that
consumers often favor flatrate tariffs, although a pay-per-use
tariff would be cheaper with regard to their actual usage
volume. From psychological perspective, the main difference
between a pay-per-use (or cost cap tariff for that matter) and a
flatrate tariff is that telephone costs are sunk in a flatrate plan
and consequently customers need not worry about the costs
of current or future usage.3 More specifically, with respect
to information and communication services, the literature has
identified four distinctive effects that are supposed to drive the
flatrate bias:
a) Insurance: The insurance effect aims at customers
that want to insure themselves against exceptionally (and
unexpectedly) high telephony bills. Customers may be risk
averse towards the correctness of their estimation of current
service usage or with respect to future changes in demand.
Therefore these customers are willing to pay (on average) more
for a flatrate plan than what the costs of a corresponding pay-
per-use tariff would be, because they are insured against these
risks. In this vein the difference between the costs for a flatrate
and the average costs for a pay-per-use tariff can be interpreted
as an insurance premium. Indeed, [11] show that the option
value attached to flatrate plans is independent of the actual
usage.
b) Convenience: As outlined before, consumers face a
tremendous variety of alternative tariffs in the mobile tele-
phony markets. The convenience effect is driven by those
consumers who want to avoid the effort of finding a cheaper
3 This corresponding psychological concept is known as “mental account-
ing” and has been investigated in a number of different domains ( [18]–[20]).
and perhaps more complex tariff.4 The costs associated with
a flatrate, however, are easily accessible and independent of
one’s own (possibly unknown) calling volume.
c) Overestimation: Consumers often fail to anticipate
their own usage of telecommunication services correctly [16];
either because of limited foresight and uncertainty in demand,
or because of bounded rationality. In anticipating their current
or future service usage, consumers have a tendency to overes-
timate their actual demand, which, in turn, will induce them to
select a flatrate plan more often. At the same time, users are
often overly confident that their usage estimation is correct
[16]. This makes the overestimation effect distinct from the
insurance effect and leads consumers to repeatedly choose the
wrong calling plan.
d) Taximeter: The so-called taximeter effect is derived
from the experience of using a taxi in a foreign city: The
taxi ride can be perceived as unpleasant, because the run-
ning taximeter constantly visualizes the currently accumulated
costs. In the telecommunications domain, the analogous effect
can for example be experienced while waiting in the queue of
a very costly hotline. Under a flatrate plan, on the contrary, all
costs are sunk ex ante and the marginal costs of consumption
are zero. This prevents consumers from experiencing the
taximeter effect, who may thus favor flatrate plans.
However, there is also a distinctive reason for customers not
to choose a flatrate plan.
e) Flexibility: By choosing a flatrate, consumers commit
themselves to pay a fixed amount for telephone usage in each
billing period, independent of their actual usage. This potential
discrepancy between actual usage and committed costs can
result in two adverse effects, which we have summarized
under the roof of “flexibility”. First, subscribers may ex post
regret their cost commitment under a flatrate plan after having
realized that a usage-based tariff would have generated lower
costs after all. Pay-per-use tariffs, on the contrary, avoid such
commitments and react flexibly to (exceptionally low) usage.
Secondly, the cost commitment may tempt flatrate subscribers
to excess telephone usage. In other words, consumers may
seek to avoid the ex post regret that they have not chosen a less
expensive pay-per-use plan and therefore exploit the flatrate by
telephoning more than reasonable. This effect is comparable
to the so-called “buffet effect” by which customers of all-you-
can-eat buffets eat more than they desire in an effort to justify
the break even costs of an all you can eat buffet in comparison
to the la carte menu [17]. Consequently, consumers with a
strong aversion against ex post regret or the buffet effect are
more likely to opt for a flexible pay-per-use tariff and seek to
4 Network providers sometimes even try to leverage the potential of conve-
nient consumers and engage in so called foggy pricing. In its most extreme
form, service providers deliberately offer dominated calling plans, because the
additional costs of doing so are very low and there is a positive probability
that convenient or uninformed consumers will actually choose this tariff. For
a critical analysis of foggy pricing see [3].
avoid the cost commitment associated with a flatrate plan.5
III. R ESEARCH Q UESTIONS
The main research question we seek to investigate in this
article is whether a cost cap tariff can also tap on one or some
of these effects and if so, how strong the impact on customer
choice will be. Due to its hybrid nature, we can presume
that the cost cap tariff can capture some of the flatrate bias
components, namely the insurance and overestimation effects,
as well as the pay-per-use component, namely the flexibility
effect. At this point, it remains open, however, how consumers
will evaluate the cost cap tariff compared to a flatrate plan
with respect to the convenience and taximeter effect. Table I
summarizes the potential impact of the identified effects on
the three fundamental tariff schemes.
TABLE I
P OTENTIAL EFFECTS ON THE CHOICE OF DIFFERENT TARIFF SCHEMES
Pay-per-use Cost Cap Flatrate
(PPU) (CC) (FR)
Insurance - + + identical in all scenarios.8 Hence, the setup measures if differ-
Convenience - ? + ent perceived extrema of usage impact tariff choice.9 Moreover,
Overestimation - + + it is emphasized that we have chosen realistic choice scenarios,
Taximeter - ? +
Flexibility + + - which are in line with average usage volumes of mobile
In the seminal analysis, it is important to isolate the psycho-
logical effects that are exhibited by a certain tariff scheme from
the underlying economic effects. Therefore, in the following
the cost cap plan is compared to a pay-per-use plan with the
same per-minute price and with a flatrate plan that is priced at
the level of the cost cap. In this way, the cost cap plan weakly
dominates both the pay-per-use and the flatrate plan and hence
tariff biases can be easily identified.6
Furthermore, recall that the pay-per-use and the flatrate
calling plan are both a one-part tariff, which put together,
constitute the two-part cost cap tariff. These tariffs are not
directly comparable to three-part tariffs (that consist of a fixed
fee, an included allowance of minutes for which the marginal
prize is zero, and a positive marginal price for additional
minutes beyond the allowance), and will therefore not be
considered here.7
In the following section we present the design of a survey
that is thought to quantify tariff bias effects and their impact on
consumers’ choice of pay-per-use, cost cap or flatrate calling
plans. In addition, in contrast to previous studies on the flatrate
bias, our analysis of the cost cap pricing scheme also offers
5 It shall be annotated that in different domains, where excessive usage
is a desired outcome to the consumer, the lack of flexibility may even
constitute a flatrate bias. With a flatrate plan, customers can strategically
commit themselves to more service usage for the same reasons as above. For
example, people often subscribe to a long term flatrate contract for health clubs
in order to commit themselves to use the gym more often. In the literature this
reverse interpretation of the flexibility effect is called ”self-discipline effect”
(cp. e.g. [9]).
6 See Section VI for ideas on possible alternative choice scenarios that
should be subject to future research.
7 Three-part tariffs are for example very popular in the US cellular phone
services market.
a new way to test the taximeter effect independent of the
insurance effect.
IV. S URVEY D ESIGN
The survey is structured in four distinctive parts.
In the first part, participants are asked to decide between
alternative tariffs in two series of hypothetical usage scenarios.
More precisely, participants are presented with several ficti-
tious usage scenarios in which they have to indicate which of
two alternative calling plans they would choose. This method-
ological approach is sometimes called quasi-experimental [12].
The first part of the survey is subdivided into two series of
choice scenarios.
In the first series of four usage scenarios participants had to
decide between a flatrate plan and a pure pay-per-use tariff.
Usage scenarios differed only by the induced minimum and
maximum usage (in minutes), whereas the average usage was
telephony and actual market prices in Germany at the time
of the survey.
For the first series of usage scenarios, respondents are ran-
domly assigned to one of two settings. In the first setting,
the usage scenarios are such that the costs of the flatrate plan
are identical to the average monthly costs under the pay-per-
use plan (45 e). Thus, we would expect to observe an equal
distribution of participants between the two alternative calling
plans. In the second setting, the flatrate is priced slightly higher
49 e). With this modified version of the question it can be
verified if a potential bias towards a flatrate is also present
under a pricing scheme with higher than average monthly
costs.
In a second series of four similar usage scenarios, all respon-
dents were asked to choose between a cost cap tariff and a
flatrate tariff. The usage scenarios were designed such that it
is possible to check for a flatrate bias over a cost cap plan.
In the second part of the survey participants are presented
with several verbal phrases, who are then asked to indicate
their consent on a five point Likert scale. These phrases are so
called “indicators” which are later aggregated to “constructs”
that measure the effects in table I. Most of the indicators
8 Analogous to the survey design of [12], [21] minimum and maximum
usage is varied in all possible combinations of 33.3̄% and 100% deviation
of the average costs per month. The corresponding min/max usage levels are
0/400, 200/400, 0/600 and 200/600 minutes.
9 The hypothetical questions were presented in the following manner: Please
imagine independently from your real usage behavior that you are using your
mobile phone on average 300 minutes per month to call into German networks
and you have to pay the bill yourself. Your amount of usage fluctuates between
the months. Below you are presented with different values of minimum and
maximum usage per month. Average usage is always 300 minutes per month.
Please indicate in all four cases your choice between tariff 1 where you pay
15 Euro cents per minute and tariff 2 where you pay 45 Euros flat.
have been adapted from [21] and [15].10 However, we derived
our own indicators with respect to those constructs that were
thought to measure the taximeter and insurance effect under
a cost cap plan as well as the flexibility effect. Additionally,
in this part of the survey respondents were asked for their
appraisal of their own usage behavior and costs. To exclude
unwanted effects stemming from the order of the items we
presented them in random order to all participants.
In the third part of the survey, data on the respondents’
actual mobile telephony tariff characteristics (such as con-
tract duration, tariff model, average monthly bill is collected.
Participants were notified that from this point on, they were
asked about their real actual mobile phone usage. In the last
and fourth part of the survey, participants were confronted
with a standard risk aversion test based on [22] in which
respondents must choose between a safe and a risky lottery in
ten settings. Participants were incentivized to answer truthfully
in the risk aversion test by offering the chance for a gift
coupon of up to 38.5 e value. The determination of the actual
value of the coupon is perfectly aligned with the decisions
in the risk aversion test and thus, the test was implemented
as a non-hypothetical setting. More precisely, to determine
the coupon value, one of the ten settings was chosen in
which the respondents participated in the respective lottery
of his choice. Lottery outcomes were also orientated on the
average mobile phone bill of participants. Since our sample is
very homogeneous we can on average neglect income effects
influencing the results.
The survey was conducted in February 2010 through a
web-based questionnaire among undergraduate students at the
Karlsruhe Institute of Technology in Germany. Students were
invited to the questionnaire via the mailing list of an introduc-
tory economics course. We stimulated participation by offering
a chance to take part in a lottery of four 25 e gift coupons
for a large online retail store after completing the survey.
96.7% of the participants decided to participate in the lottery.
Additionally one gift coupon was awarded in the risk aversion
test. Certainly, we do not claim that students of economics
are a representative panel for the German or European mobile
telephony subscriber. However, we can presume that students
are more “rational” and more aware of their mobile tariff
and the associated costs than the average subscriber. Thus,
if we find empirical evidence for systematic selection biases
in our panel, it is likely that the actual effects are in fact
even stronger. We will discuss this issue in more detail in the
following sections.
V. R ESULTS
A total of 214 respondents (23.5% female, 76.5% male)
with an average age of 20.5 years (S=1.47; min=16; max=27;
10 In particular, [21] adapted and validated well known scales from market-
ing science to measure these effects (latent variables in a statistical model)
influencing the decision in favor for a flatrate tariff. Even though the original
scale was constructed to test for the effects in connection with Internet access
prices we modified the wording only if necessary.
median=20) completed our survey successfully.11 All of the
respondents are mobile telephony customers. The mean of
the reported average monthly telephone bill in our sample is
19.14 e (S=17.53), with a noticeable discrepancy between the
mean average monthly bill of the 46.73% with prepaid tariffs
(M=10.15 e; S=9.37) compared to those with postpaid tariffs
(M=27.03 e; S=19.19). Thus, our sample contains about an
equal split of users with low and comparably high mobile
telephone usage.
At first, we investigate the degree to which the participants
in our sample are biased towards choosing a flatrate plan
over a pay-per-use plan. Table II summarizes the results.
Participants were randomly assigned to one of two settings
with different flatrate prices, in which they were asked to state
their preference for the flatrate or a pay-per-use plan in four
usage scenarios. In the first setting, which was assigned to
52.3% of the participants, the flatrate was priced at 45 e the
costs for the alternative pay-per-use plan under average usage.
The remaining 47.7% of the respondents evaluated the second
setting, in which the usage scenarios are identical, but the
flatrate is priced slightly above the average costs for the pay-
per-use plan.12
TABLE II
C HOICE OF FLATRATE OVER PAY- PER - USE PLAN
Usage (minutes) Flatrate choice at
Min Avg. Max 45 e 49 e
0 300 400 18.63% 4.46%
200 300 400 46.08% 25.00%
0 300 600 41.96% 37.50%
200 300 600 83.33% 66.96%
compared to a pay-per-use plan at 15 cents/minute
In both settings, except for the scenario with high minimum
and maximum usage, respondents favored a pay-per-use plan
over the flatrate. Previous studies have argued that in each
scenario in which the flatrate is priced at average costs
unbiased participants would be indifferent between choosing
the flatrate and the pay-per-use tariff [12], [14]. Therefore,
one would expected the flatrate to be chosen in 50% of the
cases. In a qualitatively identical setting, [12] and [14] find that
respondents chose the flatrate in three out of four scenarios at
average cost pricing and in two out of four scenarios at slightly
above average cost pricing. However, in our panel we find to
the contrary, that participants prefer the pay-per-use tariff in
three out of four scenarios in both settings. Thus, if there is a
bias in our sample, it would rather run in favor of a pay-per-
use tariff.
11 A total of 346 Students followed the link and 247 of them completed
the survey. In a final validity question 7 participants indicated to have
answered incorrectly in the survey and were eliminated from the final dataset.
Moreover, in order to increase the internal validity of the responses, another
17 observations were omitted from the analysis due to obviously random and
irrational choices in the risk aversion test. Since there are no categorical wrong
answers in the remaining parts of the survey, we generalized the validity of the
answers in the risk aversion test to the other survey questions. However, our
reported results do not significantly vary if these observations are included.
12 We decided to present a price of 49 e to them.
 We offer two alternative explanations for this finding. First,
as argued above, the respondents in our sample are students
of economics and therefore (i) aware of rational choices and
expected utility theory and (ii) sensitive to costs in general.
Moreover, the participants in our survey are also very aware
of the costs of using their mobile phone. In the items that
capture “cost control” (cp. Table III) respondents agree to
a high degree (M=4.21; S=0.72) on a 5-point Likert scale.
Second, although the relation between the usage scenarios
is identical to those in [12] and [14] we use actual market
prices.13 In [14], for example, which also considers mobile
telephony tariffs and builds on survey data from July 2006,
the flatrate is priced unrealistically low at 30 e and 33 e while
the pay-per-use tariff costs 30 cents per minute.
TABLE III
S ELF REPORTED COST AWARENESS
Cost Control
(Cronbachs’s α = 0.71, M=4.21, S=0.72)
“I can accurately assess my own mobile telephony usage
behavior”
(M=4.12; S=0.88; median=4)
“I know my calling plan and all costs involved very well.”
(M=4.43; S=0.90; median=5)
“I can accurately assess my own mobile telephony costs”
(M=4.07; S=0.92; median=4)
Next, we consider the respondents’ flatrate choice in com-
parison to cost cap tariffs in different usage scenarios (Table
IV). In this setting, the cost cap tariff offers a cap at the amount
of the flatrate price. Therefore, the cost cap tariff weakly
dominates the flatrate tariff for those usage scenarios where
the minimum usage may be below 300 minutes, i.e. the point
at where the cost cap becomes binding. Thus, in the absence
of tariff biases, one would expect that the flatrate plan is not
chosen in the first two scenarios. In the remaining two usage
scenarios, the flatrate and the cost cap are factually identical
because the cost cap is reached even under minimum usage.
Thus, there is no advantage in selecting the cost cap tariff
anymore. To the contrary, if respondents are averse towards
the taximeter effect, they may even prefer the flatrate under
these conditions. Thus, ex ante one could presume that the
flatrate is chosen in at least 50% of the cases in the latter two
scenarios.
TABLE IV
C HOICE OF FLATRATE OVER COST CAP PLAN
Usage (minutes) Flatrate choice at
Min Avg. Max 45 e
200 400 600 10.28%
250 400 550 11.21%
300 400 500 16.82%
350 400 450 17.29%
compared to a cost cap plan at 15 cents/minute and 45 e cost cap
The actual choices of respondents differ substantially from
the ex ante presumptions and are strongly in favor of the cost
13 At the time of the survey the o2o tariff offers per-minute prices of 15
cents and a cost cap at 40 e.
cap tariff. Even in those scenarios in which the cost cap tariff
has no advantage, more than 80% of the participants would
still opt for this tariff. This result reveals the great attrac-
tiveness cost cap tariffs seem to have on mobile telephony
customers, even in those settings where the cost cap tariff is
factually identical to the flatrate plan.
TABLE V
C ONSTRUCTS CAPTURING FLATRATE EFFECTS
Taximeter (FR)
(Cronbachs’s α = 0.81, M=3.67, S=1.00)
“A flatrate is good because I don’t have to think about the costs.”
(M=3.73; S=1.29; median=4)
“I enjoy using the phone less if costs increase every minute of
use”
(M=3.79; S=1.24; median=4)
“Only if I have a flatrate I enjoy using the mobile phone”
(M=3.00; S=1.39; median=3)
“If I have a flatrate I use my mobile phone in a more relaxed
and unselfconscious manner.”
(M=4.16; S=1.11; median=5)
Insurance (FR)
(Cronbachs’s α = 0.76, M=2.63, S=1.05)
“To be sure my costs of mobile telecommunication will never
be higher than a certain predefined amount I’m willing to pay
a little bit more than average”
(M=2.52; S=1.13; median=2)
“Even if a flat rate is somewhat more expensive than a pay-per-
use rate I’m happy because my costs won’t exceed the fixed
amount.”
(M=2.75; S=1.21; median=3)
Flexibility (FR)
(Cronbachs’s α = 0.63, M=3.66, S=0.76)
“It bugs me when the flatrate wasn’t profitable in a billing
period.”
(M=3.66; S=1.11; median=4)
“It feels like a deficit when another tariff would have been
cheaper than the flatrate in a billing period.”
(M=3.58; S=1.11; median=4)
“It matters to me to max out the flatrate.”
(M=3.49; S=1.19; median=4)
“It feels like a gain when the flatrate was cheaper than the next
best tariff in a billing period.”
(M=3.92; S=1.00; median=4)
Convenience
(Cronbachs’s α = 0.79, M=2.11, S=0.84)
“Figuring out which rate is better takes so long that it isn’t
worth the effort.”
(M=2.01; S=1.04; median=2)
“It is too much trouble to find out the prices for mobile
telecommunications”
(M=2.08; S=1.20; media=2)
“The money you can save by finding a better calling plan
than your current one doesn’t make up for the time and effort
involved”
(M=2.22; S=1.02; mean=2)
“The time it takes to switch to a cheaper calling plan isn’t worth
the effort.”
(M=2.11; S=1.01; median=2)
Further insight on the reasons by which mobile customers
perceive the relative attractiveness of pay-per-use, flatrate
or cost cap tariffs can be gained by evaluating the con-
structs which capture the taximeter, insurance, flexibility and
convenience effects. Furthermore, recall that cost cap tariff
framework allows us to present customers with constructs that
can capture their perception of the taximeter and insurance
 TABLE VII
effect independently. In contrast to a flatrate framework, the L OGIT R EGRESSIONS ON F LATRATE C HOICE
cost cap tariff allows for cost insurance, while maintaining
the taximeter property as long as the cost cap is not reached. Flatrate (1) vs. Flatrate (1) vs.
Therefore, we present our results separately for those con- Pay-per-use (0) Cost Cap (0)
Taximeter (FR) 0.109 -0.366∗∗
structs that are evaluated within the flatrate framework (Table (0.105) (0.129)
V) and those that are evaluated within the cost cap framework Insurance (FR) 0.327∗∗∗ 0.310∗
(Table VI).14 (0.0983) (0.122)
Flexibility (FR) -0.130 -0.210
(0.120) (0.147)
TABLE VI Taximeter (CC) -0.0243 0.268∗
C ONSTRUCTS CAPTURING COST CAP EFFECTS (0.0863) (0.109)
Insurance (CC) -0.0747 -0.234∗
Taximeter (CC) (0.0941) (0.119)
(Cronbachs’s α = 0.60, M=3.11, S=1.06) Convenience -0.0519 -0.0461
“Under a cost cap tariff I enjoy the minutes before the cost cap (0.105) (0.136)
becomes binding less.” Risk Aversion 0.0595 -0.212∗∗∗
(M=2.88, S=1.29, median=3) (0.0480) (0.0587)
“Until the cost cap becomes binding I pay more attention to my Male 0.0909 -0.254
usage behavior.” (0.199) (0.246)
(M=3.33; S=1.22; median=4) Age 0.0780 -0.0347
(0.0576) (0.0733)
Insurance (CC)
Prepaid -0.190 -0.167
(Cronbachs’s α = 0.72, M=3.47, S=0.97)
(0.195) (0.247)
“With a cost cap I can use the mobile phone more jauntily.” Bill -0.00753 0.00451
(M=3.54; S=1.06; median=4) (0.00585) (0.00620)
“I think less about my usage behavior in a tariff with cost cap, Cost Control -0.116 -0.0812
because my bill can never exceed a fixed amount.” (0.119) (0.146)
(M=3.39; S=1.13; median=4) Max Usage 0.00951 ∗∗∗ -0.00444∗
(0.000868) (0.00185)
Min Usage 0.00735∗∗∗
Notice that the internal consistency of the constructs, as (0.000855)
evaluated by Cronbach’s scale reliability coefficient α, is high Flatrate Price -0.213∗∗∗
(0.0422)
throughout (M=0.72; S=0.086). This is particularly noticeable Constant 2.382 4.337∗
for the flexibility and cost cap constructs, which have been (2.482) (2.130)
used in this study for the first time.15 Observations 852 852
Log likelihood -449.97 -320.28
Finally, we estimate the influence of the above constructs on Pseudo R2 22.15 % 6.04 %
tariff choice in a nonlinear logit model. In the regression we Correctly Classified 72.30 % 86.38%
also include the available variables on the usage scenario (min Standard errors in parentheses
∗ p < 0.05, ∗∗ p < 0.01, ∗∗∗ p < 0.001
usage, max usage, flatrate price), the individual telephony be-
havior (prepaid, bill, cost control), socio-demographics (male,
age) and the individual risk attitude as explanatory variables
in the regression model.16 cap.17 In general, the explanatory power of this model, as
evaluated by Log likelihood and Pseudo R2 , is lower compared
Table VII shows the results of the logit regressions. In the
to the first model, because the flatrate is seldomly chosen in
first model, which estimates the impact of the explanatory
our sample. Whether the respondents prefer the flatrate or the
variables on the probability to choose a flatrate plan over a
cost cap plan depends foremost on the taximeter and insurance
pay-per-use plan, only two of the four significant variables
effects as well as on the degree of risk aversion.
have a non-negligible effect. More precisely, the choice of a
flatrate plan over a pay-per-use plan is mainly driven by the An increase of a participant’s evaluation of the taximeter
insurance effect and the price of the flatrate. An increase of the effect under a cost cap plan by one unit makes him 30.6% more
insurance effect by one unit will c.p increase the probability likely to choose the flatrate. Interestingly, with respect to the
of flatrate choice by 38.7%, whereas an increase of the price flatrate taximeter effect, the impact is opposite: Respondents
by 1 e will decrease the probability of choosing the flatrate who enjoy mobile telephony more under a flatrate plan (as
by 23.7%. opposed to a pay-per-use plan) are in fact more likely to chose
a cost cap plan over the flatrate, if given the option. Moreover,
The second model estimates the participants’ choice of the
this effect is strong, since an increase in the flatrate taximeter
flatrate over the cost cap plan with the flatrate-equivalent cost
effect by one unit increases the probability of chosing a cost
cap plan by 44.1%. This analysis also reveals that the context
14 The convenience construct is in fact independent of the particular tariff
is important for the evaluation of the taximeter effect. We
framework, but listed under the flatrate effects for conciseness and compara-
bility to previous studies. will return to this point during the discussion of the results in
15 We followed the factor analysis methodology in order to eliminate and Section VI.
group the questions items according to the scale reliability coefficient.
16 Pairwise correlations (Pearson) of all explanatory variables used in the 17 The variables min usage and flatrate price were omitted from the
logit regressions were all below the threshold of 50%. regression due to collinearity or invariance, respectively.
 Likewise, also the two insurance effects have opposite
impact on the respondents choice of the flatrate plan. First,
recall that the cost cap is set at the price of the flatrate in all
choice scenarios. Therefore, respondents are equally insured
against high usage under both plans. Nevertheless, participants
are 36% more likely to chose a flatrate over a cost cap tariff if
their assessment of the insurance effect of flatrates (compared
to pay-per-use plans) increases by one unit. In reverse, if asked
for the insurance effect with explicit reference to the cost cap
tariff, a unit increase will result in an increased probability of
26.3% towards choosing the cost cap plan over the flatrate.
Again, this highlights that consumers perceive the taximeter
and insurance effect differently in the context of a flatrate or
a cost cap plan.
Interestingly, also the risk preference has a strong effect
on the choice of the two equally capped tariffs. An increase
of respondents’ risk aversion by one unit18 increases the
chances to choose the cost cap plan by 23.7%. This result is
comprehensible, since the cost cap plan does not only insure
against high usage volumes, but also against low usage.
VI. D ISCUSSION AND C ONCLUSION
In this article we have investigated mobile telephony cus-
tomers’ perception of the recently introduced cost cap tariff
in comparison to corresponding pay-per-use and flatrate plans.
Previous studies have identified several psychological effects
which are believed to bias consumers’ choice towards flatrate
plans. However, flatrate plans also limit customers’ tariff
flexibility in months of low usage. Cost cap tariffs are a
hybrid between pay-per-use and flatrate plans and can offer
cost insurance while maintaining flexibility. Our investigation
of cost cap plans reveals three main insights.
First, customers favor cost caps tariffs over flatrates that
are priced at the cost cap level, even in those usage scenarios
where the cost cap is reached with certainty. Obviously cost
cap tariffs seem to draw consumer’s attention, especially
when flexibility is important to them. In fact, in our sample
respondents show a strong desire for flexibility. In contrast to
previous quasi-experimental studies on tariff-choice, our study
cannot confirm a flatrate bias. To the contrary, our results
are in favor of a pay-per-use bias and in line with [1] and
[23], who have derived their results empirically from the 1986
Louisville, Kentucky local telephone tariff dataset. One could
argue, that the pronounced desire for flexibilty in our sample
is due to the fact that we have distributed the survey among
students of economics, who are aware of costs in general but
also primed to make rational choices. The sample is obviously
not representative of the German population and also rather
conservative in terms of biased choice. However, the same
arguments hold true for the studies that have found a flatrate
bias in a similar group [14], [21]. Furthermore, in contrast
to [14], we have confronted respondents with realistic choice
scenarios in terms of usage and prices. Nevertheless it cannot
18 Risk aversion is measured by the number of safe choices from the ten
non-hypothetical choice scenarios of the risk aversion test. Thus, the risk
aversion measure can take any integer value from 1 to 10.
be excluded that our findings are extenuated with a larger
representative set of participants. Furthermore, it is annotated
that it is not surprising that flexibility is not a significant factor
in our regression analysis: Because all respondents have in our
sample have confirmed a high desire for flexibility (M=3.66/5)
with small standard deviation (S=0.76), this construct is not a
good discriminator in the regression.
Secondly, we can confirm that the choice of cost caps
tariffs is in fact also driven by the taximeter and insurance
effects. The convenience effect, on the contrary, turns out to
be insignificant in our dataset. However, this may again be due
to a sample bias, since students do not tend to place emphasis
on convenience (M=2.11/5) and are rather homogeneous in
this perception (S=0.84).
Our third insight is more subtle and concerns the way
in which the taximeter and insurance effects influence tariff
choice. In particular, we find an opposite impact of these
effects if evaluated with respect to a flatrate or a cost cap tariff:
When given the opportunity to choose between a flatrate and
a comparable cost cap plan, those consumers tend to favor the
cost cap who prefer a flatrate (in lieu of a pay-per-use plan)
due to the taximeter effect. On the contrary, there also seems
to be a distinct taximeter effect under a cost cap plan that
induces customers to divert away from the cost cap tariff and
towards the flatrate plan. Similarly, although participants are
equally insured under the available flatrate and cost cap plan,
those customers that have revealed the insurance effect as a
driver for choosing the flatrate plan are indeed less likely to
choose a cost cap plan instead. However, if those customers
that feel insured under a cost cap tariff will also choose this
tariff variant more likely.
In summary, we find that cost cap tariffs have combined
desirable properties of pay-per-use and flatrate plans and that
customers are well aware of this. Our insights on cost cap
tariffs have direct ramifications for the strategic management
of mobile telephony providers that seek to offer this tariff. If
people are, as other studies suggest (e.g. [9], [10], [15], [19],
[24], [25]), presumably willing to pay a higher than average
monthly fee for a flatrate, it is likely that this holds also true
under a cost cap tariff. Thereby, cost cap tariffs are particularly
interesting for those customers that have a strong desire to
be insured against high telephony bills, but wish to maintain
tariff flexibility. Thus, on the one hand, the cost cap tariff is
attractive to those customers that are currently under a flatrate
plan if their perception of the cost-cap-related taximeter effect
is not too strong. Especially risk averse flatrate customers may
even be willing to opt for a cost cap plan although the cost cap
is higher than the corresponding flatrate price, because then
they are “insured” in months of low usage. On the other hand,
those users that have currently a pay-per-use plan, because
they have a strong desire for a flexible tariff or because they
have a comparably low usage volume, could also be lurked
into a cost cap tariff even if this means to accept higher per-
minute prices. In other words, these customers are willing to
pay an indirect risk premium via the per-minute price in order
to be insured against high telephone bills. If the cost cap does
not become binding, the mobile operator can especially profit
from these customers.
In fact, this latter reasoning seems to have been the main
driver for o2 to introduce a cost cap tariff whose cost cap
is set at the level of the cheapest available all-net flatrate
in the market. On the contrary, the per-minute price under
this cost cap tariff is twice as high as the cheapest standard
pay-per-use rate in the market. However, from a strategic
management perspective, it is also very risky to offer a cost
cap tariff. In contrast to a flatrate, under a cost cap plan
consumers with a comparably low usage cannot compensate
for the costs of heavy users. But, the company may also
speculate on the existence of a more subtle effect: Because
customers are insured against high costs and because the cost
cap tariff may effectively mitigate the taximeter effect with
respect to a pay-per-use plan, a customer may in fact phone
more than under a pay-per-use plan, but total costs yet remain
below the cost cap. The marketing of o2 focuses on this
aspect of the consumption behavior. Users should feel save
with the so-called ”cost airbag” and therefore do not have to
think about their consumption behavior anymore. Therefore,
the target group for this tariff scheme does not seem to be the
typical heavy or actual flatrate user, but the average user who
does not want to commit himself to high monthly costs.
We have merely presented a first step into the investigation
of cost cap tariffs, which have, to the best of our knowledge,
previously not been assessed academically. While our study
has focused more on the choice between cost cap and flatrate
plans, future work should especially consider the choice be-
tween cost cap and pay-per-use tariffs in more detail. Recall
that a cost cap tariff dominates the pay-per-use and the flatrate
plan at equal per-minute prices and at a cost cap level equal to
the flatrate price. Thus, future research should systematically
investigate the cost cap tariff bias in those scenarios where
(i) the per-minute price is higher in the cost cap tariff than
in an equivalent pay-per-use plan and (ii) the cost cap is
higher than the corresponding flatrate price. Furthermore, it
seems interesting to further investigate the reasons why the
insurance and taximeter effects are perceived differently under
a cost cap and flatrate tariff framework. Within the flatrate
framework, the insurance and taximeter effect are always
coincidental, whereas the effects can be separated under a cost
cap framework. The question remains if consumers experience
the taximeter effect even if they are insured and how this
affects their perception during telephony consumption as well
as their potential tariff switching behavior.
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