Abstract:

Products and services are increasingly offered with contracts of differing lengths.Consumers’ choice of a specific contract involves an intertemporal decision, as they have to discount future utility. Given the long duration of some contracts, consumers’ instantaneous utility for a service may be time dependent arising from uncertainty about their future needs. We study individuals’ discounting behavior while allowing for changes in instantaneous utility. We gather experimental data from price matching tasks for a subscription-based service and identify discounting patterns using a latent change-point model. Our results show that models with change-points fit individuals’ discounting pattern significantly better than models without. There is also conceptual superiority of including change-points as these are highly correlated with durations that consumersmay consider in their decisions (e.g., time till graduation). Interestingly, individuals’ discounting pattern is consistent with exponential discounting in the absence of change-points but follows a hyperbolic discounting pattern when allowing consumers’ instantaneous utility to change over time. Using a novel monetarily incentivized experimental setting, we show that individuals are unable to discount future outcomes without a bias towards the present even when they have an incentive to do so.

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