Optimal Price Skimming by a Monopolist Facing Rational Consumers

Abstract

This paper considers the intertemporal pricing problem for a monopolist marketing a new product. The key feature differentiating this paper from the extant management science literature on intertemporal pricing is the assumption that consumers are intertemporal utility maximizers. A subgame perfect Nash equilibrium pricing policy is characterized and shown to involve intertemporal price discrimination. We compare this policy to the optimal policy for a monopolist facing myopic consumers and find that for any given state, prices are always lower with rational consumers than with myopic consumers. For plausible parameter values the assumption of consumer rationality can be shown to lead to large differences in optimal prices. Moreover, if a monopolist facing rational consumers implements the optimal myopic consumer pricing policy, profits can be significantly less than if the monopolist follows the equilibrium pricing policy for rational consumers.