Learning by Consuming: Optimal Pricing with Endogenous Information Provision

TL;DR

This paper analyzes optimal revenue-maximizing contracts in a setting where a buyer's valuation evolves through learning-by-consuming, proposing a menu of try-and-decide contracts that balance initial consumption and subsequent pricing.

Contribution

It introduces a novel contract structure for endogenous information provision, addressing incentive issues without the single-crossing condition.

Findings

Optimal contracts are menu-based with first-stage pricing and second-stage per-unit prices.

Higher initial valuation buyers pay more initially and get lower prices later.

The model applies to leasing and trial-based consumption scenarios.

Abstract

We study the revenue-maximizing mechanism when a buyer's value evolves endogenously because of learning-by-consuming. A seller sells one unit of a divisible good, while the buyer relies on his private, rough valuation to choose his first-stage consumption level. Consuming more leads to a more precise valuation estimate, after which the buyer determines the second-stage consumption level. The optimum is a menu of try-and-decide contracts, consisting of a first-stage price-quantity pair and a second-stage per-unit price for the remaining quantity. In equilibrium, a higher first-stage valuation buyer pays more for higher first-stage consumption and enjoys a lower second-stage per-unit price. Methodologically, we deal with the difficulty that due to the failure of single-crossing condition, monotonicity in allocation plus the envelope condition is insufficient for incentive compatibility. Our results help to understand contracts about sequential consumption with the learning feature; e.g., leasing contracts for experience goods and trial sessions for certain courses.