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Consumer optimism and price discrimination

Eliaz, K.; Spiegler, R.; (2008) Consumer optimism and price discrimination. Theoretical Economics , 3 (4) pp. 459-497. Green open access

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Abstract

We study monopolistic design of a menu of non-linear tariffs when consumers have biased prior beliefs regarding their future preferences. In our model, consumers are "optimistic'' if their prior belief assigns too much weight to states of nature characterized by large gains from trade. A consumer's degree of optimism is his private information, and the monopolist employs the menu of non-linear tariffs to screen it. We characterize the optimal menu and show that the existence of non-common priors has significant qualitative implications for price discrimination and ex-post inefficiency. Finally, the characterization enables us to interpret aspects of real-life menus of non-linear tariffs.

Type: Article
Title: Consumer optimism and price discrimination
Open access status: An open access version is available from UCL Discovery
Publisher version: http://econtheory.org/ojs/index.php/te/article/vie...
Language: English
Additional information: Copyright 2008 Kfir Eliaz and Ran Spiegler. Reproduced under the Creative Commons Attribution - Non Commercial License 3.0
Keywords: Contracts, speculative trade, screening, non-common priors, mechanism-design, optimism, three-part tariffs
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: http://discovery.ucl.ac.uk/id/eprint/17322
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