Publication: Optimal Menu of Menus with Self-Control Preferences
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2004
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Abstract
This paper studies how a seller should design its price schedule when con-
sumers' preferences are subject to temptation. As in Gul and Pesendorfer (2001),
consumers exercise costly self-control to some degree and foresee their impulsive
behavior and self-control. Since consumers may pay a premium for an option set
that is less tempting, the seller may o®er multiple small menus. Building on the
standard model of adverse selection and second-degree price discrimination, we
characterize the optimal menu of menus for the seller. In particular, we show that
if consumers are tempted by goods of higher quality, the seller can achieve perfect
discrimination: consumers' choices appear as if the seller can observe consumers'
preferences directly. To achieve this, the seller \decorates" menus by adding items
that are never chosen but are tempting to consumers.
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Temptation, Self-control, Commitment, Nonlinear pricing, second-degree price discrimination, specialization