How should firms adapt pricing strategies when consumers are time‐inconsistent?

Abstract

Empirical evidence indicates that consumers subjectively weigh the near future more heavily than the further future. When purchasing investment products, they make payments and exert efforts before receiving payoffs. Due to the time difference between incurring cost and receiving payoff, subjective discounting can cause consumers to exhibit time‐inconsistent purchase behavior. We investigate the impact of this consumer behavior on the pricing strategies of two competing firms that sell quality‐differentiated products. In a two‐period setting, each consumer purchases the product of a firm in period one or two or leaves without a purchase. Each firm adopts either dynamic pricing to adjust prices over periods or static pricing to commit to a price. We demonstrate that a firm should adopt a strategy alongside a price trajectory that suits the magnitude of consumers’ time inconsistency and the quality of its product. Stronger time inconsistency of consumers strengthens the firm's incentive to adopt dynamic pricing. The skimming policy to decrease prices over time is not necessarily optimal for a firm adopting dynamic pricing. Static pricing is not always effective in deterring purchase postponement by consumers but can undermine a firm's profit. Compared to when both firms adopt dynamic pricing, the firm selling the high‐quality product is more likely to suffer profit loss due to consumers’ self‐control problem by unilaterally adopting static pricing, while the firm selling the low‐quality product is more likely to suffer profit loss due to lack of pricing flexibility in managing demands from differential consumer segments when both firms adopt static pricing.

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