Work

Optimal pricing scheme for addictive goods

Year: 2024

Type: article

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.

Source: The RAND Journal of Economics

DOI: 10.1111/1756-2171.12486

Author: Eleftheria Triviza

Institution: University of Mannheim

Language: English

Topic: Consumer Market Behavior and Pricing

Subfield: Marketing

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,400

Funder: Deutsche Forschungsgemeinschaft