Determining consumers' discount rates with field studies

Song Yao*, Carl F. Mela, Jeongwen Chiang, Yuxin Chen

*Corresponding author for this work

Research output: Contribution to journalArticle

32 Scopus citations

Abstract

Because utility/profits, state transitions, and discount rates are confounded in dynamic models, discount rates are typically fixed for the purpose of identification. The authors propose a strategy of identifying discount rates. The identification rests on imputing the utility/profits using decisions made in a context in which the future is inconsequential, the objective function is concave, and the decision space is continuous. They then use these utilities/profits to identify discount rates in contexts in which dynamics become material. The authors exemplify this strategy using a field study in which cell phone users transitioned from a linear to a three-part-tariff pricing plan. They find that the estimated discount rate corresponds to a weekly discount factor (.90), lower than the value typically assumed in empirical research (.995). When using a standard .995 discount factor, they find that the price coefficient is underestimated by 16%. Moreover, the predicted intertemporal substitution pattern and demand elasticities are biased, leading to a 29% deterioration in model fit and suboptimal pricing recommendations that would lower potential revenue gains by 76%.

Original languageEnglish (US)
Pages (from-to)822-841
Number of pages20
JournalJournal of Marketing Research
Volume49
Issue number6
DOIs
StatePublished - Dec 1 2012

Keywords

  • Discount rate
  • Dynamic structural model
  • Forward-looking consumers
  • Identification
  • Pricing
  • Three-part tariff

ASJC Scopus subject areas

  • Business and International Management
  • Economics and Econometrics
  • Marketing

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