Pricing and Product Design for Vice Goods: A Strategic Analysis

The rising obesity epidemic is a worldwide concern for consumers, firms, and policy makers. One reason for the rise in obesity is consumers' over-consumption of vice goods such as cookies, crackers, and soft drinks. Some authors have suggested that firms have incentives to make vice goods unhealthier and to encourage over-consumption. There are calls for regulations to ensure that firms make such products healthier by reducing harmful ingredients and provide nutritional information. Furthermore, public policy makers have begun to educate consumers to avoid over-consumption by using strategies such as pre-purchase planning. In this paper, we investigate how firms selling vice goods should respond to the growing concerns about obesity. We analyze how firms should adjust prices and product design to cater to consumers with self-control problems and obesity concerns. We use the literature on hyperbolic discounting to model consumers with self-control problems. In this framework, we examine how the unhealthiness of vice goods affects prices, firm's profits, consumer surplus, and public health. In addition, we study how public policy efforts to encourage pre-purchase planning impact firm's profits and consumers. Our results show that unlike standard goods, for vice goods a decrease in quality (i.e., increase in unhealthiness) and an increase in price can serve as a self-control device and increase demand. Therefore, firms sometimes can charge higher prices and make more profits by producing unhealthier products. Interestingly, producing unhealthier products can sometimes increase consumer surplus and improve public health. We also show that as the proportion of consumers who use pre-purchase planning increases, firms should respond by raising prices. In such situations, consumer surplus and public health improve but firm's profits decline. These results have important implications for restaurants and firms that sell vice goods and for public policy makers who aim to combat obesity.