Payment Depreciation: the Behavioral Effects of Temporally Separating Payments From Consumption

Citation: John Gourville, Dilip Soman Payment Depreciation: the Behavioral Effects of Temporally Separating Payments From Consumption.
Internet Archive Scholar (search for fulltext): Payment Depreciation: the Behavioral Effects of Temporally Separating Payments From Consumption
Tagged:

Summary

In this article, the authors claim that time between the cost of a transaction and the moment of consumption impacts the individual consumption behavior, in particular the person’s likelihood of consuming the benefits. They argue that a consumer will gradually adapt to a historic cost and therefore decrease its sunk-cost impact on the consumption of a pending benefit. They call this gradual adaption to costs with the passage of time “payment depreciation”. Subjects, for example, who pay for their concert tickets one day in advance are significantly more likely to attend to their sunk costs and go to the concert than are those who paid six months in advance. The authors present four experiments that confirmed the existence of payment depreciation and explored its consequences on the likelihood of future consumption. In the first two studies, they demonstrated that sunk cost effect is weakened by a temporal separation between an upstream cost and a downstream benefit, resulting in a greater willingness to forgo a benefit that is scheduled to expire and a greater willingness to consume a benefit that can be inventoried. In a third study, they identifies the extent of this sunk cost weakening, revealing that with enough time delay, an upstream payment will be fully discounted and the pending benefit will take on the characteristics of a free good. Finally in a fourth experiment, they showed that payment depreciation is a continuous process, resulting in gradual and steady weakening of the sunk cost effect over time.

The authors believe that their findings have important managerial implications. First, their research provide an explanation of why the bulk purchase of some products can lead to accelerated consumption. They claim that in each successive consumption, the sunk cost impact of the up-front payment will decrease because of payment depreciation and as a result, the remaining product will be consumed more readily, accelerating the overall product consumption. Second, the authors demonstrated that an increase in usage immediately after payment and a steady decrease in usage until subsequent payment can be used in the management of payment scheduling for scarce resources. For resource with steady demand over time, such as indoor athletic facilities, the authors recommend the use of longer payment cycles to reduce the total demand and suggest the staggering of payment schedules across consumers to smooth the demand. For resources with seasonal demand, such as golf clubs, the authors recommend billing all members at the same time far advance of anticipated peak demand to reduce the overall demand by the time peak season comes to pass. Finally, the authors use payment depreciation to offer an explanation of why individual investors tend to hold on to losing stocks too long. They claim that sunk cost of the payment made to purchase a stock decreases with time, making it emotionally less painful to sell it later as opposed to earlier.