EXPRESS: Pay More, Use More: Consumer Bias and Demand Management for Digital Services

Consumers often purchase access to a digital service by paying an upfront fee, and then consume the service over a period of time. In this article, we examine the implications of such temporal separation of purchase and consumption on a user’s consumption choices, and on the firm’s optimal demand management strategy. Relying on behavioral economics and consumer behavior literature, we develop a formal micro-founded model of a user’s decision calculus, and use it to derive the implied demand function and thus analyze the firm’s optimal decisions. In contrast to the classical recommendation to pursue admission control through higher prices as a means to manage demand for the digital service, we find that when mental accounting bias is a key driver of consumer choices, it might be optimal for a firm to pursue consumption control through lower prices. These results are robust when quality is endogenized, capacity is constrained, subscription duration is finite, and in the presence of a two-part tariff. We translate our findings into a conceptual framework for digital service management that characterizes the optimal demand management strategy along two key dimensions: the strength of the consumer bias and the cost of servicing demand. When these factors are significant, firms need to employ a combination of admission control and consumption control so as to manage and maintain profitability.