An Empirical Analysis of Consumer Purchase Decisions Under Bucket-Based Price Discrimination

Bucket-based price discrimination is a unique price format that involves monthly subscription fees and instantaneous quotas (the number of rental products that can be checked out). We propose an empirical model in which consumers make dynamic purchase decisions under consumption uncertainty, accounting for the constraints imposed by the instantaneous quota. Applying the model to an online DVD rental data set, we find that (1) consumers incur a large disutility (∼$8) from stockout (i.e., unmet consumption needs); (2) such a disutility drives consumers' overpurchase of the service quota as a way to avoid potential stockout situations; and (3) the dynamics of overpurchase are driven by the interplay between trends in consumption needs and the magnitude of consumers' plan-switching costs. We run counterfactual exercises to better understand how the instantaneous quota and stockout risk affect consumers' consumption rates, purchase decisions, and firm profitability. We find that the instantaneous quota induces a greater stockout compared with a monthly quota. We further demonstrate that the company should recognize the drivers of the dynamics in overpurchase to balance short- and long-term profitability—for example, by offering targeted discounts to customers with excess overpurchase.