Publication: Optimal Menu of Menus with Self-Control Preferences
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2005
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NAJ Economics
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Abstract
Unlike consumers in standard economic models, the average consumer has to deal
with temptation and go through a costly process of self-control. What if firms are aware of consumers’ self-control problems? Does it affect firms’ optimal selling strategies qualitatively?
To answer this question, we use Gul–Pesendorfer utility formulation and characterize a monopolist’s optimal selling scheme in the otherwise standard model of nonlinear pricing. With costly self-control, the firm can earn more profits by offering multiple menus (or plans). If the temptation of consumers is to buy a larger quantity (or a good of higher quality), a set of menus can be designed to extract all the surplus: with those menus, consumption choices appear as if the consumers’ preferences were observable. If the temptation is to choose a smaller quantity (or spend more on outside options), full surplus extraction is not possible. The optimal scheme in this case charges entry fees since they work as a commitment device for consumers.
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Temptation, Self-control; Nonlinear pricing; Pooling; Participation fees, Commitment, Nonlinear pricing, second-degree price discrimination, full surplus extraction, entry fees, specialization
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NAJ Economics. 2005, vol. 12