Who Can See the Future? Information and Consumer Reactions to Future Price Discounts

This paper extends the literature on consumer reactions to future price changes to a new context – markets with substantial repeat purchase behavior – where the efficacy of common dynamic pricing strategies turns on the strength of these reactions. Utilizing the unique discount structure in automobile insurance, I am able to measure the extent to which consumers react to changes in the future price path, holding current prices fixed. In the aggregate, the answer is not at all. However, there is a well-defined set of “informed” consumers, who are less likely to depart as they approach discounts. And these consumers are also the most responsive to current prices from firms in the external market, suggesting that they truly have more information about “hard to know” prices. Limiting attention to these informed consumers, I also examine the pattern of discount factors, finding support for quasi-hyperbolic discounting, rather than either standard models or more general hyperbolic discounting models.