Working Paper: CEPR ID: DP5862
Authors: Jan Boone; Joel Shapiro
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: Addictive goods; Endogenous types; Experience goods; Price discrimination
JEL Codes: D42; D82; L12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monopolist's pricing strategy (D42) | Upward distortion of consumption for myopic consumers (D11) |
| Discounts for low-valuation types (H43) | Higher valuations (G19) |
| Monopolist's pricing strategy (D42) | Quality schedule distortion for forward-looking consumers (L15) |
| Quality schedule distortion (L15) | Strong preference for consumption to realize type upgrades (D11) |
| Consumer education (G53) | Enhanced future valuations (G19) |