Implications of Hyperbolic Discounting for Optimal Pricing and Scheduling of Unpleasant Services That Generate Future Benefits

Abstract

People tend to lack the self-control to undergo an unpleasant service that would generate future benefits. This paper derives a tractable quasi-hyperbolic discounting model of that behavioral tendency (for a queueing system in which service time is short relative to the time horizon for its benefits). Planning in advance, people may naively overestimate their self-control. This paper shows how customers' lack of self-control and naivete affect optimal pricing and scheduling. The welfare-maximizing usage fee and the revenue-maximizing usage fee decrease with customers' lack of self-control. Charging for subscription, in addition to or instead of per use, increases revenue, especially when subscribers are naive. If the manager can charge for subscription or per use, subscription is optimal for revenue maximization, whereas usage-based pricing is optimal for welfare maximization. If customers are heterogeneous in their self-control and naivete, priority scheduling can dramatically increase welfare and revenue. This paper was accepted by Christian Terwiesch, operations management.