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Susanna Esteban Dpt of Economics Universidad
Carlos III de Madrid E-mail: sesteban@eco.uc3m.es Tel: (+34) 91 624 5874 Address Office 15.1.08 – Dept. of Economics Calle Universidad
Carlos III de Madrid Getafe
28903, Madrid SPAIN |
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Research
Temptation,
Self-Control and Optimal Pricing
Nonlinear Pricing with
Self-Control Preferences, with Eiichi Miyagawa and
Matthew Shum
Journal of
Economic Theory, vol 135 (2007), no 1, pages 306-336
Paper [PDF]
Abstract A
basic assumption of economics is that consumers choose what they want. However,
many consumers find it difficult to stop overeating, overspending, smoking, procrastinating,
etc, even though they want to. In reality, consumers have temptation and it is
psychologically costly to exercise self-control. To clarify the implications of
the existence of temptation and self-control costs, this paper studies a firm's
optimal selling strategy exploiting the behavioral features of consumers. We
characterize optimal nonlinear pricing schemes for a monopoly when self-control
is costly for consumers as in Gul and Pesendorfer (2001). Since consumers have
a preference for commitment, the firm faces a trade-off between offering a
small menu that makes the consumers' self-control easier and offering a large
menu that achieves better price discrimination. We show that the optimal menu
resembles the one in thestandard nonlinear pricing problem with a price
ceiling, where the upper bound on prices is determined endogenously by a
participation constraint. The constraint motivates the firm to offer a
relatively flat and compact price schedule, serving more consumers with low
demand. The characterization also shows that the firm may earn less if
consumers have temptation.
JEL
Classifications D42, D82, L12, L15.
Keywords
Temptation, self-control, commitment, nonlinear pricing, price discrimination ■
Optimal Menu of Menus with
Self-Control Preferences, with Eiichi Miyagawa, submitted
Peer
reviewed in NAJ Economics, Peer Reviews of Economics
Publications, vol. 12, September 24, 2005 [link]
Paper
[PDF]
Abstract
Standard theories of optimal pricing are based on the assumption that
consumers are free from temptation. To study whether the presence of temptation
has a significant impact on a firm's optimal pricing strategy, we consider the
formulation of temptation due to Gul and Pesendorfer (2001), and study the
monopolist's optimal nonlinear pricing problem. We show that if temptation
raises consumers' marginal value for the quality of goods, the firm can achieve
perfect discrimination by offering multiple menus that target different
consumer types. To eliminate consumers' incentives to mimic others, the firm
adds to the menus items that are tempting and ex ante undesirable for any
unintended customer. The perfect discrimination result is robust, holding even
if the deviation from standard preferences is arbitrarily small and if other
behavioral formulations are adopted. We also show that participation fees,
which play little role in the standard problem, have an effect of reducing
consumers' disutility from self-control and enable the firm to extract more
surplus when facing consumers with temptation.
JEL
Classification D11, D42, D82, L12, L15, M31
Keywords
Temptation, self-control, commitment, nonlinear pricing, second-degree price
discrimination, perfect discrimination, entry fees, specialization ■
Temptation,
Self-Control, and Competitive Nonlinear Pricing, with
Eiichi Miyagawa
Economic
Letters, Volume 90, Issue 3, March 2006, Pages 348-355
Paper [PDF]
Abstract
Standard pricing theories consider consumer without temptation. With temptation
and costly self-control, consumers dislike choice sets with tempting alternatives.
We study firms’ strategy against such consumers, using Gul-Pesendorfer
preferences and a game where firms compete by offering menus.
JEL
Classification D43, L13, L15
Keywords
Temptation, Self-control, Nonlinear pricing, Pooling,
Participation fees ■
Durable
Goods and Secondary Markets
Durable
Goods Oligopoly with Secondary Markets: the Case of Automobiles,
with Matthew Shum
RAND
Journal of Economics, 38 (2007) , pp 332–354
Paper
[PDF]
Appendices
[Table
of summary statistics of data]
Abstract
We study the effects of durability and secondary markets on equilibrium firm
behavior in the car market. When there are secondary markets, forward-looking
firms internalize the effect of their current production decisions on their
current and future profits. We construct a dynamic oligopoly model of a
differentiated product market to incorporate the equilibrium production
dynamics which arise from the durability of the goods and their trade in
secondary markets. We derive an econometric model and estimate its parameters
using data from the automobile industry over a twenty-year period. Our
estimates are used to provide a measure of the competitive importance of the
secondary market. ■
Demand
and Supply Estimation Biases of Omitting Durability, with
Jiawei Chen and Matthew Shum
Journal of Econometrics,
forthcoming (special refereed issue on Demand Estimation)
Paper
[PDF]
Abstract
In this paper, we build a dynamic equilibrium model
of a durable goods oligopoly with a competitive secondary market to evaluate
the
bias in
estimating the structural parameters of demand and supply when omitting the
durability of the product and its trade in the secondary market. Our approach
is to obtain simulated data from our dynamic durable-goods model and then use
these data to estimate the static counterpart of the model that omits
durability. We find that the static estimate of the elasticity of demand is an
overestimate of the true elasticity and the static estimate of the firms'
markup is an underestimate. The markup bias is larger in magnitude than the
elasticity of demand bias, which suggests that a correct specification of firm
behavior is crucial in order to draw policy implications for durable-good
markets. ■
Effective
Scrappage Subsidies
Contributions
to Theoretical Economics —The B.E. Journals in Theoretical Economics, Volume 7,
Issue 1, Article 9
Paper
[PDF]
Abstract It is a common
practice for governments to offer scrappage subsidies in order to stimulate the
early removal of used cars and modify the distribution of vehicle holdings. In
this paper, we analyze the market implications of such subsidies when producers
have market power and face competition from a secondary used car market. One
key result is that with market power, a subsidy can induce scrappage even if
its monetary value is less than the price of a used car without a subsidy. We
provide a full characterization of the effects of scrappage subsidies on
primary and secondary markets for the case of a monopoly, and show that the
subsidy that maximizes aggregate welfare pays less for a used car than its
price without a subsidy. Our results contrast with the predictions derived from
a model with perfect competition.
JEL Classification
H23, L5, L42
Keywords
Scrappage Subsidy, Secondary Market, Market Power, Automobile Industry,
Minimum Subsidy ■
Market
Structure, Scrappage and Moral Hazard, with
Gerard Llobet
Economic
Letters, Volume 88, Issue 2, August 2005, Pages 203-208
Paper [PDF]
Abstract In the presence
of moral hazard, the optimal contract for a durable-goods monopolist is a lease
with an option to buy. This contract is optimal regardless of the monopolist's
ability to commit and creates inefficient scrappage.
JEL
Classification L11, L12
Keywords
Monopoly; Moral hazard; Scrappage; Maintenance; Durability ■
Equilibrium
Dynamics in Semi-Durable Goods Markets, revise and resubmit
Paper
[PDF]
Abstract
In this paper I study the dynamic behavior of
prices and production in markets for semi-durable goods with competing
secondary markets. With a non-stochastic version of the model, I show that
production and prices oscillate but converge to their steady state levels;
secondary market prices have wider oscillations than primary market prices;
transactions in primary and secondary markets have negative co-movements; and,
more competitive primary markets have wider oscillations in production. With a
stochastic version of the model, I show that secondary market prices are more
volatile than primary market prices; the variance of production increases with
the number of firms; and, for sufficiently concentrated markets, the variance
of production can be smaller than the variance of production in a static
(nondurable goods) model. ■
How much Competition is a
Secondary Market?, with Jiawei Chen and Matthew
Shum
Paper
[PDF]
Abstract
In this paper, we build a dynamic equilibrium
model of durable goods oligopoly, in which consumers face lumpy costs of
transacting in the secondary car market and to which they respond by buying and
selling infrequently. We calibrate the model using aggregate data from the
In
Progress
The
Measuring Market Power in a Durable
Goods Oligopoly: the Sports Car Market, with
Matthew Shum,
manuscript, January 2001.
Large Menus with Temptation,
Self-Control, and Flexibility Preferences, in
progress
Car Cycles,
with Alejandro Riano and Matthew Shum, in progress
Catching-up,
with Gerard Llobet, in progress