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Selling to Consumers with Endogenous Types

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Author Info

  • Boone, J.
  • Shapiro, J.

    (Tilburg University, Tilburg Law and Economics Center)

Abstract

For 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 behavior.

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Bibliographic Info

Paper provided by Tilburg University, Tilburg Law and Economic Center in its series Discussion Paper with number 2006-021.

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Date of creation: 2006
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Handle: RePEc:dgr:kubtil:2006021

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Web page: http://www.tilburguniversity.nl/tilec/

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References

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Cited by:
  1. Petal Jean Hackett, 2012. "Cutting too Close? Design Protection and Innovation in Fashion Goods," CESifo Working Paper Series 3716, CESifo Group Munich.

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