Tradeoffs Between Short and Long Contract Periods:The Impacts of Hyperbolic

Title:Tradeoffs Between Short and Long Contract Periods: The Impacts of Hyperbolic Discounting and Reference Duration

Lecturer:Prof Chen YuxinNYU Shanghai

Time:PM1:30-3:00,Nov.27th,(Wed), 2013.

Place:Room 104, North Building


Consumers face an inter-temporal trade-off when choosing a contract period of a periodically offered product or service - a short contract period gives consumers the flexibility to switch plans or providers while a long one provides a price discount. To understand how consumers will discount future continuous benefits and its impact on their willingness-to-pay for contract periods is important especially for firms offering a product or service with periodic (monthly, yearly or seasonal) contractual pricing plans. In this paper, we characterize empirically individuals’ discounting behavior of future continuous benefits that they receive from periodic use or access to a product or service. We find systematic discontinuities in consumer’s valuation of future consumption utility, which is largely attributable to the interplay of contract length and consumers’ reference duration. We show that ignoring such discontinuities may lead to wrong inference of consumer’s discounting behavior. In particular, researchers may fail to identify the hyperbolic discounting behavior of consumer if they do not take into account the impact of reference duration on consumer’s assessment of future utility.


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