Intertemporal price discrimination with time-inconsistent consumers

Abstract

We consider the intertemporal price discrimination problem of a durable good monopolist facing a population of consumers who are time inconsistent. We show that price trajectories, profits and welfare are sensitive to consumers’ first- and second-order beliefs regarding their time preferences. Surprisingly, we find that sales and profits are largest when consumers are sophisticated, i.e., when consumers hold correct expectations on their own future choices. The monopolist is thus unable to take advantage of consumers’ naiveté, and could instead benefit from informing consumers about their true preferences and commitment problems, or otherwise communicate its beliefs about them.