DP3760 Monopoly Pricing of 'Cyclical' Goods

Author(s): Ramon Caminal
Publication Date: February 2003
Keyword(s): cyclical preferences, loyalty-rewarding schemes, monopoly pricing, repeat purchases
JEL(s): D42, L14
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3760

Consumption of certain commodities produces transitory saturation, in the sense that potential instantaneous utility for an additional unit is very low immediately after a consumption episode, but increases over time. Such cyclical patterns of preferences have important implications for monopoly pricing: (i) In the absence of commitment, prices may be close to marginal cost. (ii) Prices may be non-monotonic with respect to the degree of commitment, reaching a maximum for intermediate degrees of commitment. (iii) Introduction of loyalty-rewarding schemes may benefit both buyers and sellers. (iv) Restrictions on the timing of purchases (purchase deadlines, sales, contracting both price and frequency) are likely to hurt consumers and increase efficiency.