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Optimal Non-Linear Pricing Scheme When Consumers Are Habit Forming

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  • Eleftheria Triviza

Abstract

This article analyses how consumers' habit formation affects firms' pricing policies. We consider both sophisticated consumers, who realize that their current consumption will affect future consumption, and naive consumers, who do not. The optimal contract for sophisticated consumers is a two-part tariff. The main result is that under naive habit formation, the optimal pricing pattern is a three-part tariff; namely a fixed fee, with some units priced below cost --- and after their end --- pricing above marginal cost. This holds both under symmetric and asymmetric information.

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  • Eleftheria Triviza, 2019. "Optimal Non-Linear Pricing Scheme When Consumers Are Habit Forming," CRC TR 224 Discussion Paper Series crctr224_2019_098v1, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2019_098v1
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp098
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    Keywords

    three-part tariff; nonlinear pricing; naivete; habit formation;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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