Intertemporal pricing with boundedly rational consumers

Abstract

Flexible pricing plans are commonly observed in service industries. In this article, we argue that the presence of flexible pricing plans can be attributed to consumers being boundedly rational -these consumers do not always select the best available option; rather, they select better options more often. In our model, the seller faces consumers who are heterogeneous in their degrees of intertemporal inconsistencytheir ultimate actions can be different from their intended actions. We show that, in response to these boundedly rational consumers the seller may be able to extract more profit by setting different prices in different periods and allowing the consumers to self-select which period to pay. Moreover, a single pricing plan may emerge as an optimal pricing scheme even when the consumers are heterogeneous in their degrees of rationality and the seller is not fully aware of the consumers' types. We further show that the pricing patterns depend primarily on the relative discounting factor between the seller and the consumers.