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Abstract

Unlike consumers in standard economic models, the average consumer has to deal with temptation and go through a costly process of self-control. What if firms are aware of consumers’ self-control problems? Does it affect firms’ optimal selling strategies qualitatively? To answer this question, we use Gul–Pesendorfer utility formulation and characterize a monopolist’s optimal selling scheme in the otherwise standard model of nonlinear pricing. With costly self-control, the firm can earn more profits by offering multiple menus (or plans). If the temptation of consumers is to buy a larger quantity (or a good of higher quality), a set of menus can be designed to extract all the surplus: with those menus, consumption choices appear as if the consumers’ preferences were observable. If the temptation is to choose a smaller quantity (or spend more on outside options), full surplus extraction is not possible. The optimal scheme in this case charges entry fees since they work as a commitment device for consumers.

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Bibliographic Info

Paper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/4992.

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Handle: RePEc:ner:carlos:info:hdl:10016/4992

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Web page: http://www.uc3m.es

Related research

Keywords: Temptation; Self-control; Nonlinear pricing; Pooling; Participation fees; Commitment; Nonlinear pricing; second-degree price discrimination; full surplus extraction; entry fees; specialization;

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References

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1. Esteban, Susanna & Miyagawa, Eiichi & Shum, Matthew, 2007. "Nonlinear pricing with self-control preferences," Journal of Economic Theory, Elsevier, vol. 135(1), pages 306-338, July.
   
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   • Shum, Matthew & Esteban, Susanna & Miyagawa, Eiichi, . "Nonlinear Pricing with Self-Control Preferences," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/4995, Universidad Carlos III de Madrid.
   • Susanna Esteban & Eiichi Miyagawa & Matthew Shum, 2003. "Nonlinear Pricing with Self-Control Preferences," Discussion Papers 0304-03, Columbia University, Department of Economics.
   • Esteban, Susanna & Miyagawa, Eiichi & Shum, Matthew, 2003. "Nonlinear Pricing with Self-Control Preferences," Working Papers 10-03-1, Pennsylvania State University, Department of Economics.
2. Klaus Wertenbroch, 1998. "Consumption Self-Control by Rationing Purchase Quantities of Virtue and Vice," Marketing Science, INFORMS, vol. 17(4), pages 317-337.
3. Jianjun Miao, 2008. "Option exercise with temptation," Economic Theory, Springer, vol. 34(3), pages 473-501, March.
   
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4. Hamilton, Jonathan & Slutsky, Steven, 2004. "Nonlinear price discrimination with a finite number of consumers and constrained recontracting," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 737-757, June.
   
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6. W. Pesendorfer & F. Gul, 1999. "Temptation and Self-Control," Princeton Economic Theory Papers 99f1, Economics Department, Princeton University.
   
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7. Stefano Della Vigna & Ulrike Malmendier, 2004. "Contract Design and Self-control: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 353-402, May.
   
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8. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
9. Sharon M. Oster & Fiona M. Scott Morton, 2005. "Behavioral Biases Meet the Market: The Case of Magazine Subscription Prices," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 0(1), pages 1.
10. Ted O'Donoghue & Matthew Rabin, 1999. "Incentives For Procrastinators," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 769-816, August.
    
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11. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
12. Bagnoli, Mark & Salant, Stephen W & Swierzbinski, Joseph E, 1995. "Intertemporal Self-Selection with Multiple Buyers," Economic Theory, Springer, vol. 5(3), pages 513-26, May.
13. Jonathan Gruber & Sendhil Mullainathan, 2002. "Do Cigarette Taxes Make Smokers Happier?," NBER Working Papers 8872, National Bureau of Economic Research, Inc.
    
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14. Stefano DellaVigna & Ulrike Malmendier, 2006. "Paying Not to Go to the Gym," American Economic Review, American Economic Association, vol. 96(3), pages 694-719, June.
15. DeJong, David N. & Ripoll, Marla, 2007. "Do self-control preferences help explain the puzzling behavior of asset prices?," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1035-1050, May.
16. repec:bla:restud:v:73:y:2006:i:3:p:689-714 is not listed on IDEAS
17. Esteban, Susanna & Miyagawa, Eiichi, 2006. "Temptation, self-control, and competitive nonlinear pricing," Economics Letters, Elsevier, vol. 90(3), pages 348-355, March.
18. Eugenio J. Miravete, 2003. "Choosing the Wrong Calling Plan? Ignorance and Learning," American Economic Review, American Economic Association, vol. 93(1), pages 297-310, March.

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Citations

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Cited by:

1. Joaquín Gómez Miñambres, 2011. "Temptation, horizontal differentiation and monopoly pricing," Economics Working Papers we1124, Universidad Carlos III, Departamento de Economía.
2. Michael D. Grubb, 2009. "Selling to Overconfident Consumers," American Economic Review, American Economic Association, vol. 99(5), pages 1770-1807, December.
   
   • Michael D. Grubb, 2006. "Selling to Overconfident Consumers," Discussion Papers 06-018, Stanford Institute for Economic Policy Research.
3. Esteban, Susanna & Miyagawa, Eiichi, 2006. "Temptation, self-control, and competitive nonlinear pricing," Economics Letters, Elsevier, vol. 90(3), pages 348-355, March.
4. Richard J. Zeckhauser & Erzo F.P. Luttmer, 2008. "Schedule Selection by Agents: from Price Plans to Tax Tables," 2008 Meeting Papers 406, Society for Economic Dynamics.
   
   • Luttmer, Erzo F. P. & Zeckhauser, Richard, 2008. "Schedule Selection by Agents: from Price Plans to Tax Tables," Working Paper Series rwp08-008, Harvard University, John F. Kennedy School of Government.
   • Erzo F.P. Luttmer & Richard J. Zeckhauser, 2008. "Schedule Selection by Agents: from Price Plans to Tax Tables," NBER Working Papers 13808, National Bureau of Economic Research, Inc.
5. Natalia Shestakova, 2010. "Overcoming Consumer Biases in the Choice of Pricing Schemes: A Lab Experiment," CERGE-EI Working Papers wp418, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
6. Wojciech Olszewski, 2011. "A model of consumption-dependent temptation," Theory and Decision, Springer, vol. 70(1), pages 83-93, January.
7. repec:ner:carlos:info:hdl:10016/12066 is not listed on IDEAS
8. 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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