An Empirical Analysis of Consumer Purchase Decisions under Price - Discrimination Bucket Pricing

Abstract

Price-Discrimination bucket pricing (PDBP) is a unique price format that usually involves monthly subscription fees and instantaneous quotas. We propose an empirical model in which consumers make dynamic purchase decisions under consumption uncertainty, accounting for the constraints imposed by the instantaneous quota. Applying the model to an online DVD rental data, we find that (1) consumers have a large disutility (~$8) related to stockout (i.e., unmet consumption needs due to the quota limit), (2) such disutility drives the consumers’ overpurchase of the service quota as a way to avoid potential stockout situations and (3) the dynamics of overpurchase are driven by the interplay between trends in consumption needs and the magnitude of consumers’ plan-switching costs. We run counterfactual exercises to better understand how the instantaneous quota and stockout risk affect consumers’ consumption rates, purchase decisions and firm profitability. We find that the company does not benefit from replacing the instantaneous quota with a monthly quota, or from allowing consumers to cover their stockout with a marginal fee. We further demonstrate that the company should recognize the drivers of the dynamics in overpurchase to balance the shortand long-term profitability for example, by offering targeted discounts to customers with excess overpurchase.

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Cite this paper

@inproceedings{Sun2015AnEA, title={An Empirical Analysis of Consumer Purchase Decisions under Price - Discrimination Bucket Pricing}, author={Yacheng Sun and Shibo Li and Baohong Sun and Ajay Kalra}, year={2015} }