Purchase Decisions with Non-Linear Pricing Options Under Risk - Experimental Evidence

Abstract

We experimentally investigate purchase decisions with linear and non-linear pricing under risk. The experiment is based on a single period stochastic inventory problem with endogenous cost. It extends classic binary lottery experiments to test standard decision theoretic predictions concerning purchasing behavior in a rebate and a discount scheme. We investigate to what extent customers continue to purchase under two mathematically isomorph formats of nonlinear schemes even if switching to a linear pricing scheme is optimal. Our results indicate that rebate and discount schemes exert a significant attraction on customers. Given the increased role of non-linear pricing schemes, systematic deviations from optimal behaviour are an important element in the design of such schemes and may raise consumer protection and competition questions. We discuss how our results can be explained by decision heuristics.

Keywords: rebate, discount, linear price, newsvendor problem, stochastic inventory problem, lotteries, risk preferences

JEL Classification: C91, D81, D40, L42