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Nonlinear pricing with self-control preferences

Esteban, Susanna and Miyagawa, Eiichi and Shum, Matthew (2007) Nonlinear pricing with self-control preferences. Journal of Economic Theory, 135 (1). pp. 306-338. ISSN 0022-0531. doi:10.1016/j.jet.2006.04.007.

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A basic assumption of economics is that consumers choose what they want. However, many consumers find it difficult to stop overeating, overspending, smoking, procrastinating, etc, even though they want to. In reality, consumers have temptation and it is psychologically costly to exercise self-control. To clarify the implications of the existence of temptation and self-control costs, this paper studies a firm’s optimal selling strategy exploiting the behavioral features of consumers. We characterize optimal nonlinear pricing schemes for a monopoly when self-control is costly for consumers. Since consumers have a preference for commitment, the firm faces a trade-off between offering a small menu that makes the consumers’ self-control easier and offering a large menu that achieves better price discrimination. We show that the optimal menu resembles the one in the standard nonlinear pricing problem with a price ceiling, where the upper bound on prices is determined endogenously by a participation constraint. The ceiling motivates the firm to offer a relatively flat and compact price schedule, serving more consumers with low demand. The characterization also shows that the firm may earn less if consumers have temptation.

Item Type:Article
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Shum, Matthew0000-0002-6262-915X
Additional Information:© 2006 Elsevier Inc. Received 15 April 2004; final version received 21 April 2006. Available online 20 July 2006. We thank the editor, Alessandro Lizzeri, and an anonymous referee for helpful comments, which greatly improved the paper. We thank Eric Bond, Kalyan Chatterjee, Matthew Jackson, and Larry Samuelson for helpful comments and discussion. We also thank the participants of the SED 2002 Conference at New York University, the Henry Luce 2003 Conference at the Pennsylvania State University, the Clarence W. Tow 2003 Conference at the University of Iowa, and seminars at Concordia University and Tokyo Institute of Technology. An earlier draft of this paper was titled “Optimal Pricing of Temptation Goods.”
Subject Keywords:Temptation; Self-control; Commitment; Nonlinear pricing; Price discrimination
Issue or Number:1
Record Number:CaltechAUTHORS:ESTjet07
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:12160
Deposited By: Lindsay Cleary
Deposited On:27 Oct 2008 23:07
Last Modified:08 Nov 2021 22:26

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