Temptation, horizontal differentiation and monopoly pricing

Joaquín Gómez Miñambres
Authors registered in the RePEc Author Service: Joaquin Gomez-Minambres

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: 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

Keywords: Temptation; Commitment; Price; discrimination (search for similar items in EconPapers)
JEL-codes: D11 D42 D82 L11 L12 L15 (search for similar items in EconPapers)
Date: 2011-07-25
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-mkt
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Journal Article: Temptation, horizontal differentiation and monopoly pricing (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:we1124

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