Selling to Consumers with Endogenous Types
AbstractFor many goods (such as experience goods or addictive goods), consumers' preferences may change over time. In this paper, we examine a monopolist's optimal pricing schedule when current consumption can affect a consumer's valuation in the future and valuations are unobservable. We assume that consumers are anonymous, i.e. the monopolist can't observe a consumer's past consumption history. For myopic consumers, the optimal consumption schedule is distorted upwards, involving substantial discounts for low valuation types. This pushes low types into higher valuations, from which rents can be extracted. For forward looking consumers, there may be a further upward distortion of consumption due to a reversal of the adverse selection effect; low valuation consumers now have a strong interest in consumption in order to increase their valuations. Firms will find it profitable to educate consumers and encourage forward-looking behaviour.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5862.
Date of creation: Oct 2006
Date of revision:
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Other versions of this item:
- Boone, J. & Shapiro, J., 2006. "Selling to Consumers with Endogenous Types," Discussion Paper 2006-74, Tilburg University, Center for Economic Research.
- Jan Boone & Joel Shapiro, 2006. "Selling to consumers with endogenous types," Economics Working Papers 992, Department of Economics and Business, Universitat Pompeu Fabra.
- Boone, J. & Shapiro, J., 2006. "Selling to Consumers with Endogenous Types," Discussion Paper 2006-021, Tilburg University, Tilburg Law and Economic Center.
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-11-04 (All new papers)
- NEP-MIC-2006-11-04 (Microeconomics)
- NEP-MKT-2006-11-04 (Marketing)
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