Optimal Menu of Menus with Self-Control Preferences ⁄

Abstract

Unlike consumers in standard economic models, the average consumer has to deal with temptation and go through a costly process of self-control. What if firms are aware of consumers’ self-control problems? Does it affect firms’ optimal selling strategies qualitatively? To answer this question, we use Gul‐Pesendorfer utility formulation and characterize a monopolist’s optimal selling scheme in the otherwise standard model of nonlinear pricing. With costly self-control, the firm can earn more profits by offering multiple menus (or plans). If the temptation of consumers is to buy a larger quantity (or a good of higher quality), a set of menus can be designed to extract all the surplus: with those menus, consumption choices appear as if the consumers’ preferences were observable. If the temptation is to choose a smaller quantity (or spend more on outside options), full surplus extraction is not possible. The optimal scheme in this case charges entry fees since they work as a commitment device for consumers.