Intertemporal price discrimination with time-inconsistent consumers

Mathematical Social Sciences, vol. 126, pp. 42–47

Abstract

We consider the intertemporal price discrimination problem of a durable good monopolist facing a population of consumers who are time inconsistent. We show that price trajectories, profits and welfare are sensitive to consumers’ first- and second-order beliefs regarding their time preferences. Surprisingly, we find that sales and profits are largest when consumers are sophisticated, i.e., when consumers hold correct expectations on their own future choices. The monopolist is thus unable to take advantage of consumers’ naiveté, and could instead benefit from informing consumers about their true preferences and commitment problems, or otherwise communicate its beliefs about them.

Authors 4

1. János Flesch

   Maastricht University

   Affiliation as printed

   Department of Quantitative Economics, Maastricht University, The Netherlands

2. Zsombor Zoltán Méder Aachen Institute of Psychology, Leiden University

   Leiden University

   Affiliation as printed

   Institute of Psychology, Leiden University, The Netherlands

3. Ronald J.A.P. Peeters corresponding

   University of Otago

   Affiliation as printed

   Department of Economics, University of Otago, PO Box 56, Dunedin 9054, New Zealand

4. Yianis Sarafidis

   Charles River Associates

   Affiliation as printed

   Charles River Associates, WA, United States