Determining Consumers' Discount Rates with Field Studies

Journal of Marketing Research, 49(6), pp. 822-841, 2012

56 Pages Posted: 12 Jan 2011 Last revised: 28 Feb 2018

See all articles by Song Yao

Song Yao

Washington University in St. Louis - John M. Olin Business School

Carl F. Mela

Duke University - Fuqua School of Business

Jeongwen Chiang

China Europe International Business School (CEIBS)

Yuxin Chen

Northwestern University - Department of Marketing

Date Written: June 13, 2012

Abstract

Because utility/profits, state transitions and discount rates are confounded in dynamic models, discount rates are typically fixed for the purpose of identification. We propose a strategy of identifying discount rates. The identification rests upon imputing the utility/profits using decisions made in a context where the future is inconsequential, the objective function is concave, and the decision space is continuous; and then using these utilities/profits to identify discount rates in contexts where dynamics become material. We exemplify this strategy using a field study wherein cellphone users transitioned from a linear to three-part-tariff pricing plan.

We find that the estimated discount rate corresponds to a weekly discount factor (0.90), lower than the value typically assumed in empirical research (0.995). When using a standard 0.995 discount factor, we find the price coefficient is underestimated by 16%. Moreover, the predicted inter-temporal substitution pattern and demand elasticities are biased, leading to a 29% deterioration in model fit; and suboptimal pricing recommendations that would lower potential revenue gains by 76%.

Keywords: dynamic structural model, identification, forward-looking consumers, pricing, three-part tariff, discount rate

Suggested Citation

Yao, Song and Mela, Carl F. and Chiang, Jeongwen and Chen, Yuxin, Determining Consumers' Discount Rates with Field Studies (June 13, 2012). Journal of Marketing Research, 49(6), pp. 822-841, 2012. Available at SSRN: https://ssrn.com/abstract=1738544 or http://dx.doi.org/10.2139/ssrn.1738544

Song Yao (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

HOME PAGE: http://www.songyao.org

Carl F. Mela

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7767 (Phone)

Jeongwen Chiang

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

Yuxin Chen

Northwestern University - Department of Marketing ( email )

Kellogg School of Management
2001 Sheridan Rd.
Evanston, IL 60208
United States

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