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 behavior.
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Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 992.
Date of creation: Aug 2006
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Web page: http://www.econ.upf.edu/
Endogenous types; experience goods; addictive goods; price discrimination;
Other versions of this item:
- Boone, J. & Shapiro, J., 2006. "Selling to Consumers with Endogenous Types," Discussion Paper 2006-021, Tilburg University, Tilburg Law and Economic Center.
- Boone, Jan & Shapiro, Joel, 2006. "Selling to Consumers with Endogenous Types," CEPR Discussion Papers 5862, C.E.P.R. Discussion Papers.
- Boone, J. & Shapiro, J., 2006. "Selling to Consumers with Endogenous Types," Discussion Paper 2006-74, Tilburg University, Center for Economic Research.
- 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-2007-03-10 (All new papers)
- NEP-MIC-2007-03-10 (Microeconomics)
- NEP-MKT-2007-03-10 (Marketing)
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