Learning by Consuming: Optimal Pricing for a Divisible Good

47 Pages Posted: 22 Oct 2023

See all articles by Huiyi Guo

Huiyi Guo

Texas A&M University - Department of Economics

Wei He

Prince of Wales Hospital - The Chinese University of Hong Kong

Bin Liu

The Chinese University of Hong Kong, Shenzhen

Abstract

We study the revenue-maximizing mechanism when a buyer's value evolves because of learning-by-consuming. The buyer chooses the initial consumption based on his rough valuation. Consuming more induces a finer valuation estimate, after which he determines the final consumption. The seller faces the tradeoff that selling more initially makes selling the rest more profitable but on a smaller base. The optimum is a try-and-decide contract. In equilibrium, a higher first-stage valuation buyer chooses more initial consumption and enjoys a lower second-stage per-unit price. Methodologically, we address the difficulty that without the single-crossing condition, monotonicity plus envelope condition is insufficient for incentive compatibility. Our results help to understand contracts with learning features, e.g., course packages with included sessions and leasing agreements for experience goods.

Keywords: Dynamic mechanism design, Learning by consuming, Endogenous type distribution, Quantity effect, Experience good.

Suggested Citation

Guo, Huiyi and He, Wei and Liu, Bin, Learning by Consuming: Optimal Pricing for a Divisible Good. Available at SSRN: https://ssrn.com/abstract=4609572 or http://dx.doi.org/10.2139/ssrn.4609572

Huiyi Guo

Texas A&M University - Department of Economics ( email )

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Wei He

Prince of Wales Hospital - The Chinese University of Hong Kong ( email )

Bin Liu (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

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