Optimal Design and Pricing of Sequenced Bundles in the Presence of Satiation
28 Pages Posted: 7 Dec 2023
Date Written: November 29, 2023
Problem definition: Sequencing of consumption has significant implications for enjoyment of experiential goods and derived ex-post utility due to psychological and physiological effects, such as satiation, habituation, or memory decay. In this paper, we examine the effect of consumption sequencing on ex-ante valuations of bundles, with the goal of increasing consumer surplus and revenue.
Methodology/results: We conduct a lab experiment to elicit preferences and willingness to pay for
three bundles of goods consisting of two high (H) type products and one low (L) type product that vary only in the position of low type product. We find that consistent with the satiation model, 53% of subjects prefer the HLH sequence, placing an approximately 2.7% greater ex-ante valuation over the second-best LHH sequence. The LHH sequence is optimal under the acclimation, and memory decay model and preferred by 31% of subjects. The front-loaded HHL sequence, optimal under the discounted expected utility model, is preferred by 16% of subjects. We estimate the parameters of the satiation model and find that satiation effects are significant with a half-life of 17 hours.
Managerial implications: Using the calibrated satiation model, we optimize consumption for each
period and find that, compared to a bundle with equal consumption in each period, the optimal bundle has a greater selling probability and achieves a revenue lift in excess of 4.5%.
Keywords: Satiation, Experiment, Pricing
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