A Model of Consumer Learning for Service Quality and Usage

In many services, e.g., the wireless service industry, consumers choose a service plan based on their expected consumption. In such situations, consumers experience two forms of uncertainty. First, consumers may be uncertain about the quality of their service provider and can learn about it after repeated use of the service. Second, consumers can be uncertain about their own usage of minutes and learn about it after observing their actual consumption. We propose a model to capture this dual learning process while accounting for the nonlinearity of the pricing scheme used in wireless services. Our results show that both quality and quantity learning are important. Several policy experiments are conducted to capture the effect of consumer learning, pricing and service quality on customer lifetime value (CLV). We find that consumer learning can result in a win-win situation for both consumers and firm -- consumers leave less minutes on the table while the firm sees an increase in overall customer lifetime value. For instance, we find that there is a 35% increase (about $75) in overall CLV with consumer learning than without. The key driver of this result is the change in the retention rate with and without learning.