Self-control,addiction and optimal pricing: Theory and evidence
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    Abstract:

    Consumers with self-control problems often more easily develop harmful addictions to an addictive good,which will motivate firms to set its prices by taking advantage of such addictions.Hence,based on the addiction model of O’Donoghue and Rabin( 1999a,2002) ,this paper explores how a monopolist designs its pricing strategy for the addictive time-inconsistent consumers.We show that,when the initial addiction level is zero for all consumers,the sophisticates more easily develop a life-time addiction than naifs do,so the monopolist sets a higher price for them. In contrast,when the consumers have developed harmful addictions,the monopolist prices more for naifs than sophisticates since the former are tempted by the good to a greater extent.Naturally,rational consumers ( TCs) are priced the lowest.The main settings and conclusions of our theory qualitatively match the empirical evidences from Chinese online game industry.

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  • Online: April 16,2018
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