Consumer Loss Aversion and Dynamic Optimal Pricing

This paper studies the role of loss-averse consumers' expectations about their future consumption in the pricing policy of a monopolistic firm in a dynamic setting. The firm offers a contract consisting of two units of service and the consumer makes two sequential consumption choices: to buy the first unit or not and if she buys it, to buy the second unit or not. Before signing the contract, the consumer has expectations about her consumption. We show that if the consumer expects to buy the second unit with a high probability, the optimal pricing scheme of the firm is a "bargain then rip-off" contract, i.e., a fixed fee and prices for the first and second units below and above marginal cost, respectively