Becoming Strategic: Endogenous Consumer Time Preferences and Multiperiod Pricing
Forthcoming, Operations Research
50 Pages Posted: 7 Sep 2016 Last revised: 24 Sep 2019
Date Written: June 11, 2019
Pricing over multiple periods under forward-looking, strategic consumer purchasing behavior has received significant recent research attention; however, whether consumers actually benefit from this behavior and would voluntarily choose to be strategic has not been previously considered. We explore this question by developing a model of endogenous time preferences, consistent with several well-established microeconomic theories of boundedly rational intertemporal decision-making, in which consumers choose to become strategic by exerting costly effort. We show three key implications of this choice. First, considering the consumer choice to be strategic can have a significant impact on firm and consumer decisions, in particular qualitatively impacting the firm's optimal pricing policy. Second, it is possible to increase firm profit, consumer welfare, and social welfare simultaneously by increasing the cost of strategic behavior, suggesting firms can, essentially, force consumers to be myopic and make all parties better off; this helps explain how firms that do the most to make strategic behavior difficult are able to attract more demand and be successful in the marketplace. And third, efforts to mitigate strategic consumer waiting by committing to future prices instead of pricing dynamically may decrease the cost of strategic behavior and backfire, encouraging more consumers to be strategic; hence, in contrast to most previous research, price commitment may yield lower profit than dynamic pricing if consumers can choose to be strategic.
Keywords: strategic consumer behavior, dynamic pricing, price commitment, revenue management
JEL Classification: C44, D42, D01
Suggested Citation: Suggested Citation