Price Discrimination with Experience Goods: a Structural Econometric Analysis
Firms often offer menus of two-part tariffs to price
discriminate among consumers with heterogeneous preferences.
In this paper we study the effectiveness of this screening
mechanism when consumers are uncertain about the quality of
the good and resolve this uncertainty through consumption
experiences. We use consumer-level data to estimate a
dynamic structural model of forward-looking consumers with
heterogeneous demands, both ex-ante and ex-post, for an
experience good sold by a monopolist offering a fixed menu
of two-part tariffs. Our analysis highlights four elements
that influence consumer behavior and affect pricing
strategies: beliefs, switching costs, experiential learning,
and (ex-ante) mistakes in tariff choice. Since elements of
our data contradict the rational expectations assumption, we
impose a slightly weaker beliefs assumption. Despite
consumers having, on average, unbiased priors, their beliefs
conditional on tariff choice are biased. Consumers on flat
fee tariffs tend to have optimistic priors whereas consumers
on per-use tariffs tend to have pessimistic priors.
Combined with high switching costs, this sorting-induced
bias implies that flat fee tariffs can yield high profits
for the firm even after optimistic consumers revise their
beliefs. Biased priors also lead to biased expectations of
consumer surplus. Realized surplus is on average negative,
despite expectations of surplus of \$118 per consumer.
Regarding the use of menus, we find they are ineffective,
yielding almost no gain over the optimal single two-part
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