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Inter-temporal Price Discrimination with Time Inconsistent Consumers

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  • Yianis Sarafidis
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    Abstract

    This paper looks at the inter-temporal price discrimination game that arises when a monopolist faces naïve-time-inconsistent consumers. En route to solving this game, we introduce two new solution concepts for dynamic games where some players are time inconsistent. The first solution concept is similar in spirit to the subgame perfect Nash equilibrium, whereas the second one relies on backwards induction. Unlike in standard finite games, these solution concepts are not equivalent, even with perfect information. We then use these solution concepts to solve the inter-temporal pricing game with time inconsistent consumers. We derive implications for monopoly profits, consumer welfare and the path of prices (Coase conjecture). We conclude that time inconsistency will reduce monopoly profits and the welfare of all consumers, except of the highest valuation ones. Moreover, with time inconsistent consumers the path of prices will approach marginal cost, but at a lower rate

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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 479.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:ecm:nasm04:479

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    Keywords: time inconsistency; durable goods monopoly; solution concepts;

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    1. Ted O'Donoghue & Matthew Rabin, 2001. "Choice And Procrastination," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 121-160, February.
    2. Bernheim, B Douglas, 1984. "Rationalizable Strategic Behavior," Econometrica, Econometric Society, vol. 52(4), pages 1007-28, July.
    3. Gul, Faruk & Sonnenschein, Hugo & Wilson, Robert, 1986. "Foundations of dynamic monopoly and the coase conjecture," Journal of Economic Theory, Elsevier, vol. 39(1), pages 155-190, June.
    4. Matthew Rabin & Ted O'Donoghue, 1999. "Doing It Now or Later," American Economic Review, American Economic Association, vol. 89(1), pages 103-124, March.
    5. Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers 97-251, University of California at Berkeley.
    6. Malmendier, Ulrike M. & Della Vigna, Stefano, 2003. "Contract Design and Self Control: Theory and Evidence," Research Papers 1801, Stanford University, Graduate School of Business.
    7. Pearce, David G, 1984. "Rationalizable Strategic Behavior and the Problem of Perfection," Econometrica, Econometric Society, vol. 52(4), pages 1029-50, July.
    8. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
    9. David Besanko & Wayne L. Winston, 1990. "Optimal Price Skimming by a Monopolist Facing Rational Consumers," Management Science, INFORMS, vol. 36(5), pages 555-567, May.
    10. Ted O'Donoghue & Matthew Rabin, 1997. "Incentives for Procrastinators," Discussion Papers 1181, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
    12. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
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    Cited by:
    1. Zafer Akin, 2010. "Intertemporal Decision Making with Present Biased Preferences," Working Papers 1001, TOBB University of Economics and Technology, Department of Economics.

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