Optimal Pricing Scheme for Addictive Goods

Eleftheria Triviza*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

This article analyses how consumers' habit formation and addiction affect firms' pricing policies. I consider both sophisticated consumers, who realize that their current consumption will affect future tastes, and “naive” consumers, who do not. The optimal contract for sophisticated consumers is a two-part tariff. The main result is that the optimal pricing pattern when the consumer is naive is a “bargain then rip-off” contract, namely a fixed fee, with the first units priced below cost, and then priced above marginal cost. This holds both under symmetric and asymmetric information about the consumers' degree of sophistication.
Original languageEnglish
Pages (from-to)603-626
Number of pages24
JournalRAND Journal of Economics
Volume55
Issue number4
Early online date31 Oct 2024
DOIs
Publication statusPublished - Dec 2024

Bibliographical note

Publisher Copyright:
© 2024 The Author(s). The RAND Journal of Economics published by Wiley Periodicals LLC on behalf of The RAND Corporation.

Keywords

  • addiction
  • habit formation
  • naivety
  • non-linear pricing

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