Optimal Menu of Menus with Self-Control Preferences
AbstractThis paper studies how a seller should design its price schedule when consumers' preferences are subject to temptation. As in Gul and Pesendorfer (2001), consumers exercise costly self-control to some degree and foresee their impulsive behavior and self-control. Since consumers may pay a premium for an option set that is less tempting, the seller may offer multiple small menus. Building on the standard model of adverse selection and second-degree price discrimination, we characterize the optimal menu of menus for the seller. In particular, we show that if consumers are tempted by goods of higher quality, the seller can achieve perfect discrimination: consumers' choices appear as if the seller can observe consumers' preferences directly. To achieve this, the seller "decorates" menus by adding items that are never chosen but are tempting to consumers.
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Date of creation: 24 Sep 2005
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- Susanna Esteban & Eiichi Miyagawa, 2004. "Optimal menu of menus with self-control preferences," Discussion Papers 0405-11, Columbia University, Department of Economics.
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- Erzo F.P. Luttmer & Richard J. Zeckhauser, 2008.
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- Kalyan Chatterjee & R. Vijay Krishna, 2005. "Menu Choice, Environmental Cues and Temptation: A “Dual Self” Approach to Self-control," Levine's Working Paper Archive 784828000000000576, David K. Levine.
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