DP5862 Selling to Consumers with Endogenous Types

Author(s): Jan Boone, Joel Shapiro
Publication Date: October 2006
Keyword(s): addictive goods, endogenous types, experience goods, price discrimination
JEL(s): D42, D82, L12
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5862

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.