Time Inconsistency and Product Design: A Strategic Analysis of Feature Creep

Many new products have several features that are not used by most consumers. One explanation for consumers buying products with features that they do not use is that consumers value features and ease of use differently at the point of purchase and at the time of usage. This behavior can be explained by consumer biases such as hyperbolic discounting. Some researchers claim that such consumer biases encourage firms to offer too many features at the cost of making products less user friendly. This paper examines how consumer biases such as hyperbolic discounting and naive expectations affect pricing, product design, firm profits, and welfare. We build a game theoretic model in which consumers need to invest in learning in order to use the additional features of a product. In our model, consumers use quasi-hyperbolic discounting, and some consumers have naive beliefs about their future learning behavior. Contrary to intuition, we show that hyperbolic discounting encourages firms to focus more on ease of learning rather than on investing in additional features. We also find that consumer biases do not always hurt consumers but can sometimes lead to improvement in consumer welfare. From a public policy perspective, our results suggest that educating consumers to reduce the number of overly optimistic consumers could be welfare reducing. We also show that firms can improve learning by making features complementary or by having a consistent design to encourage sequential learning of features. Our analysis also reveals that one approach to make consumers learn existing features may be to add more complementary features. We also investigate whether allowing consumers to choose between simple and feature-rich products would enhance welfare. We find that providing consumers with more choice can lead to reduced consumer welfare.