| Summary: | This article analyses how consumers' habit formation and addiction affect firms' pricing policies. I consider both sophisticated consumers, who realize that their current consumption will affect future tastes, and "naive" consumers, who do not. The optimal contract for sophisticated consumers is a two‐part tariff. The main result is that the optimal pricing pattern when the consumer is naive is a "bargain then rip‐off" contract, namely a fixed fee, with the first units priced below cost, and then priced above marginal cost. This holds both under symmetric and asymmetric information about the consumers' degree of sophistication.
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