Date of Original Version

5-2006

Type

Working Paper

Rights Management

All Rights Reserved

Abstract or Description

Bucket pricing entails a prepaid price and a maximum consumption limit, which requires consumers to make advance purchase decisions before their consumption needs are fully revealed. We propose a dynamic model that involves how consumers form expectations of future consumption needs, learn to reduce uncertainty through experience, and make optimal advance purchase decisions. Applying the model to an online DVD rental history data, we examine how consumption uncertainty may drive advance purchase decisions. Consumers tend to overpurchase to cover the unexpected volatility of future consumption needs, avoid stockouts and switching costs. Over time, consumers learn to reduce uncertainty but only those with lower switching costs adjust their overpurchases to adapt to their reduced uncertainty. Bucket pricing could lead to greater profits if higher-level plans were more attractive, which would induce consumers to overpurchase more. By explicitly modeling advance purchase decision making and empirically investigating consumer decision processes, this article helps managers better understand the effects of price/quota combinations on consumer choice.

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