Pricing Vice Goods for Goal-Driven Consumers

Abstract

Research in psychology shows that consumption goals can help consumers avoid excessive consumption of vice goods and the associated long-term harm. In this paper, we propose a model of self-control with consumption goals and examine how goals moderate the behavior of consumers and the firm's strategy. We find that consumers' personal goals lead to a lower price for a less unhealthy product, but a higher price for a more unhealthy product. Furthermore, even though personal goals reduce the sales of a product, the firm can be better off if consumers have goals rather than no goals. The improvement in the firm's profits need not be at consumers' expense. In fact, consumer welfare increases with personal goals. In some contexts, consumption is not driven by personal goals but shaped by social norms, such as the advice of experts or social groups. We find that unlike personal goals, normative goals make consumers less sensitive to price and do not always improve consumer welfare. Furthermore, normative goals can hurt the firm's profits in contexts where personal goals could improve profits. Finally, we show that our framework with dynamically inconsistent preferences yields results that are consistent with alternative formulations of consumer self-control problems, such as the dual-self model of Thaler and Shefrin (1981) and the costly self-control model of Gul and Pesendorfer (2001).

Keywords: vice goods, consumption goals, pricing, self-control, present bias, behavioral economics, behavioral IO

JEL Classification: D4, D91, L10