Selling to Consumers with Endogenous Types

Jan Boone and Joel Shapiro

No 5862, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: For many goods (such as experience goods or addictive goods), consumers' preferences may change over time. In this paper, we examine a monopolist's optimal pricing schedule when current consumption can affect a consumer's valuation in the future and valuations are unobservable. We assume that consumers are anonymous, i.e. the monopolist can't observe a consumer's past consumption history. For myopic consumers, the optimal consumption schedule is distorted upwards, involving substantial discounts for low valuation types. This pushes low types into higher valuations, from which rents can be extracted. For forward looking consumers, there may be a further upward distortion of consumption due to a reversal of the adverse selection effect; low valuation consumers now have a strong interest in consumption in order to increase their valuations. Firms will find it profitable to educate consumers and encourage forward-looking behaviour.

Keywords: Endogenous types; Experience goods; Addictive goods; Price discrimination (search for similar items in EconPapers)
JEL-codes: D42 D82 L12 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-mic and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Selling to Consumers with Endogenous Types (2006)
Working Paper: Selling to consumers with endogenous types (2006)
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