Temptation, horizontal differentiation and monopoly pricing
We study the implications for pricing strategies and product offerings of consumers’ temptation when the differentiation of the product is horizontal. With horizontal differentiation, the temptation state is represented by a change in the consumers’ ideal product on the Hotelling line, so that consumers have two (possibly distinct) ideal products: one when committed and another when tempted. The firm faces the following trade-off: for the consumer who diverge the most between the ideal product with temptation and commitment, if the firm positions a product close to the consumer’s temptation ideal product, it increases the consumer’s surplus when tempted but decreases surplus with commitment, which lowers the consumer’s incentive to participate. This paper shows that, because of this trade-off, the firm may exclude products that are too close to the temptation preferences in the optimal menu. Moreover, it is shown that product diversity and firm’s profits decrease with the probability of temptation and with the consumers’ awareness of their dynamic inconsistency
|Date of creation:||Jul 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +34-91 6249594
Fax: +34-91 6249329
Web page: http://www.eco.uc3m.es
More information through EDIRC
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.:
- Laibson, David I., 1997.
"Golden Eggs and Hyperbolic Discounting,"
4481499, Harvard University Department of Economics.
- Eddie Dekel & Barton L. Lipman & Aldo Rustichini, 2006.
Boston University - Department of Economics - Working Papers Series
WP2006-024, Boston University - Department of Economics.
- Eddie Dekel & Barton Lipman & Aldo Rustichini, 2006. "Temptation–Driven Preferences," Discussion Papers 1423, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Eddie Dekel & Barton L. Lipman & Aldo Rustichini, 2005. "Temptation–Driven Preferences," Boston University - Department of Economics - Working Papers Series WP2005-005, Boston University - Department of Economics.
- Susanna Esteban & Eiichi Miyagawa, 2005. "Optimal Menu of Menus with Self-Control Preferences," NajEcon Working Paper Reviews 784828000000000455, www.najecon.org.
- Brocas, Isabelle & Carrillo, Juan D., 2005. "A theory of haste," Journal of Economic Behavior & Organization, Elsevier, vol. 56(1), pages 1-23, January.
- 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.
- Matt Shum & S Esteban & E Miyagawa, 2003. "Nonlinear Pricing with Self-Control Preferences," Economics Working Paper Archive 503, The Johns Hopkins 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.
- 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.
- Esteban, Susanna & Miyagawa, Eiichi, 2006. "Temptation, self-control, and competitive nonlinear pricing," Economics Letters, Elsevier, vol. 90(3), pages 348-355, March.
- Faruk Gul & Wolfgang Pesendorfer, 2001.
"Temptation and Self-Control,"
Econometric Society, vol. 69(6), pages 1403-1435, November.
- Malmendier, Ulrike M. & Della Vigna, Stefano, 2003.
"Contract Design and Self Control: Theory and Evidence,"
1801, Stanford University, Graduate School of Business.
- 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.
- Ted O'Donoghue and Matthew Rabin ., 1997.
"Doing It Now or Later,"
Economics Working Papers
97-253, University of California at Berkeley.
- O'Donoghue, Ted & Rabin, Matthew, 1997. "Doing It Now or Later," Department of Economics, Working Paper Series qt7t44m5b0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Ted O'Donoghue & Matthew Rabin, 1996. "Doing It Now or Later," Discussion Papers 1172, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Kreps, David M, 1979. "A Representation Theorem for "Preference for Flexibility"," Econometrica, Econometric Society, vol. 47(3), pages 565-77, May.
- B. Douglas Bernheim & Antonio Rangel, 2004. "Addiction and Cue-Triggered Decision Processes," American Economic Review, American Economic Association, vol. 94(5), pages 1558-1590, December.
- Kfir Eliaz & Ran Spiegler, 2006.
"Contracting with Diversely Naive Agents,"
Review of Economic Studies,
Oxford University Press, vol. 73(3), pages 689-714.
When requesting a correction, please mention this item's handle: RePEc:cte:werepe:we1124. 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: ()
If references are entirely missing, you can add them using this form.