This paper examines how consumers' willingness to pay for goods is determined by past patterns of consumption. The central result is a theorem of interior maximum, which states that willingness to pay for a good is maximized at a moderate level of habitual consumption. The theorem is derived from a simple model of adaptive behavior that involves a shifting S-shaped value function. The detailed analysis of the impact of consumption frequency and intensity on willingness to pay reveals an unsuspected implication of diminishing sensitivity, even as it leads to a formalization of consumer habituation patterns (including sensitization, habituation, and response recovery upon withdrawal) that matches and integrates the most robust empirical regularities attendant on nonassociative learning in neurobiology and behavioral psychology. An examination of the implications for demand dynamics and pricing highlights deterministic recurrent and transient patterns of consumption at higher price points.
Volume (Year): 50 (2004)
Issue (Month): 5 (May)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- George Loewenstein, Ted O'Donoghue and Matthew Rabin., 2000.
"Projection Bias in Predicting Future Utility,"
Economics Working Papers
E00-284, University of California at Berkeley.
- Loewenstein, George & O'Donoghue, Ted & Rabin, Matthew, 2000. "Projection Bias in Predicting Future Utility," Department of Economics, Working Paper Series qt5qh6142m, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Loewenstein, George & O'Donoghue, Ted & Rabin, Matthew, 2002. "Projection Bias in Predicting Future Utility," Working Papers 02-11, Cornell University, Center for Analytic Economics.
- George Loewenstein & Ted O'Donoghue & Matthew Rabin, 2001. "Projection Bias in Predicting Future Utility," General Economics and Teaching 0012003, EconWPA.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
- Pradeep K. Chintagunta, 1999. "Variety Seeking, Purchase Timing, and the "Lightning Bolt" Brand Choice Model," Management Science, INFORMS, vol. 45(4), pages 486-498, April.
- Fournier, Susan, 1998. " Consumers and Their Brands: Developing Relationship Theory in Consumer Research," Journal of Consumer Research, Oxford University Press, vol. 24(4), pages 343-73, March.
- T. Borgers & R. Sarin, 2010.
"Naïve Reinforcement Learning With Endogenous Aspirations,"
Levine's Working Paper Archive
381, David K. Levine.
- Borgers, Tilman & Sarin, Rajiv, 2000. "Naive Reinforcement Learning with Endogenous Aspirations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(4), pages 921-50, November.
- Tilman Börgers & Rajiv Sarin, . "Naive Reinforcement Learning With Endogenous Aspiration," ELSE working papers 037, ESRC Centre on Economics Learning and Social Evolution.
- Loewenstein, George & Adler, Daniel, 1995. "A Bias in the Prediction of Tastes," Economic Journal, Royal Economic Society, vol. 105(431), pages 929-37, July.
- Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
- Becker, Gary S & Murphy, Kevin M, 1988.
"A Theory of Rational Addiction,"
Journal of Political Economy,
University of Chicago Press, vol. 96(4), pages 675-700, August.
- Gary S. Becker & Kevin M. Murphy, 1986. "A Theory of Rational Addiction," University of Chicago - George G. Stigler Center for Study of Economy and State 41, Chicago - Center for Study of Economy and State.
- Luc Wathieu, 1997. "Habits and the Anomalies in Intertemporal Choice," Management Science, INFORMS, vol. 43(11), pages 1552-1563, November.
- Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 745-63, Part I Ju.
- Laibson, David I., 2000.
"A Cue-Theory of Consumption,"
4481496, Harvard University Department of Economics.
- Ratner, Rebecca K & Kahn, Barbara E & Kahneman, Daniel, 1999. " Choosing Less-Preferred Experiences for the Sake of Variety," Journal of Consumer Research, Oxford University Press, vol. 26(1), pages 1-15, June.
- David Bowman & Deborah Minehart & Matthew Rabin, 1994.
"Loss aversion in a consumption/savings model,"
International Finance Discussion Papers
492, Board of Governors of the Federal Reserve System (U.S.).
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:50:y:2004:i:5:p:587-596. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.