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 language | English |
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Pages (from-to) | 603-626 |
Number of pages | 24 |
Journal | RAND Journal of Economics |
Volume | 55 |
Issue number | 4 |
Early online date | 31 Oct 2024 |
DOIs | |
Publication status | Published - 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