Research Details

Abstract

Because utility/profits, state transitions and discount rates are confounded in dynamic models, discount rates are typically fixed for the purpose of identification. We propose a strategy of identifying discount rates. The identification rests upon imputing the utility/profits using decisions made in a context where the future is inconsequential, the objective function is concave, and the decision space is continuous; and then using these utilities/profits to identify discount rates in contexts where dynamics become material. We exemplify this strategy using a field study wherein cellphone users transitioned from a linear to three-part-tariff pricing plan. We find that the estimated discount rate corresponds to a weekly discount factor (0.90), lower than the value typically assumed in empirical research (0.995). When using a standard 0.995 discount factor, we find the price coefficient is underestimated by 16%. Moreover, the predicted inter-temporal 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%.

Type

Article

Author(s)

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

Date Published

2012

Citations

Yao, Song, Carl F. Mela, Jeongwen Chiang, and Yuxin Chen. 2012. Determining Consumers' Discount Rates With Field Studies. Journal of Marketing Research.(6): 822-841.