Temptation horizontal differentiation and monopol

Authors: Joaquín GómezMiñambres

Publish Date: 2014/04/30

Volume: 78, Issue: 4, Pages: 549-573

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Abstract

We study the implications for monopoly pricing strategies and product diversity of consumers’ temptation when the differentiation of the product is horizontal Consumers have an exante ideal product “commitment preferences” but they and the monopolist are aware that consumers may fall prey to “temptation preferences” expost with some probability Our results indicate that when consumers are aware of their dynamic change in preferences the firm cannot take advantage of consumers’ temptation but instead in order to attract them into the store the firm must compensate exante consumers for the possibility of yielding to temptation once inside the store As a result this paper shows that the firm narrows the variety of products not offering those products close to temptation preferences Moreover it is shown that product prices and firm’s profits decrease with the probability of temptation and with the consumers’ awareness of their dynamic inconsistencyThis paper is a modified version of Chapter 2 of my doctoral dissertation submitted at Universidad Carlos III de Madrid in July 2011 I am exceedingly grateful to my advisors hbox Mmathrma Ángeles de Frutos and Susanna Esteban for their valuable advice and suggestions All remaining errors are attributable to meWe show that a gap with no products in left underlinetheta bartheta right subseteq left theta k1 right can be improved upon by designing a product with hatq in left underlinetheta bartheta right Let underlinep be the price of the product underlinetheta and barp be the price of product bartheta Assume with no loss of generality that consumer hattheta in left underlinetheta bartheta right buys product bartheta Then product hatx =left hattheta hatp right where hatp =max left underlinep +tleft hattheta underlinetheta right barp+tleft hattheta bartheta right right is feasible and yields more profits Thus repeating this argument we get that in equilibrium qtheta =theta for all theta in underlinetheta bartheta It is immediate from the analysis in Sect 4 that in equilibrium Vxv=WbarM theta NFC=0 so tqvpi theta NFC0=pi tqvpi theta NFC theta NFC Hence the tempting choice when the market is nonfully covered depends on the temptation probability pi and the number of consumers served theta NFC Where fracmathrmdqvpi theta NFCmathrmdpi 0 and fracmathrmdqvpi theta NFCmathrmdtheta NFC0Finally note that since underlinetheta =1 p = s t10 Moreover since Vxv=0 pv= s tqv0 Therefore from the definition of theta k Uxtheta k theta k=Uxv theta k we get that theta k=0 square

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