Determining Consumers’ Discount Rates With Field Studies

Determining Consumers’ Discount Rates With Field Studies Because utility/profits, state transitions and discount rates are confounded in dynamic models, discount rates are typically fixed to estimate the other two factors. Yet these rate choices, if misspecified, generate poor forecasts and policy prescriptions. Using a field study wherein cellphone users transitioned from a linear to three-part-tariff pricing plan, we estimate a dynamic structural model of minute usage and obtain discount factors that would normally be unidentifiable. The identification rests upon imputing the utility under linear pricing plans without dynamic structure; then using these utilities to identify discount rates when consumers were switched to a three-part tariff where dynamics became material. We find that the estimated segment-level weekly discount factors (0.86 and 0.91) are much lower than the value typically assumed in empirical research (0.995). When using a standard 0.995 discount rate, we find the price coefficients are underestimated by 23%. Moreover, the predicted intertemporal substitution pattern and demand elasticities are biased, leading to a 27% deterioration in model fit; and sub-optimal pricing recommendations that would lower potential revenue gains by 74-88%.