Determining consumers' discount rates with field studies

Journal Article (Journal Article)

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%. © 2012, American Marketing Association.

Full Text

Duke Authors

Cited Authors

  • Yao, S; Mela, CF; Chiang, J; Chen, Y

Published Date

  • January 1, 2012

Published In

Volume / Issue

  • 49 / 6

Start / End Page

  • 822 - 841

International Standard Serial Number (ISSN)

  • 0022-2437

Digital Object Identifier (DOI)

  • 10.1509/jmr.11.0009

Citation Source

  • Scopus