Temporal separation of payments and consumption in online payment systems and their impact on firm strategies

Although practitioner research in Information Systems has touted the relevance of online payment systems as a critical element for success of e-commerce business models, the strategic needs for adopting online payment systems are still unclear to most firms. This dissertation studies how one design feature of online payment systems – pricing scheme or temporal separation of payments and consumption - may be used strategically to compete in the market for information goods. I incorporate consumer “mental accounting” (MA) from Behavioral Economics literature into a firm level model. Contrary to the predictions from traditional microeconomic theories, the results from my game theoretic models show that when consumers are assumed to maintain mental accounts, the choice of pricing schemes does matter to firms in a competitive market. An experiment is conducted to further evaluate the analytical findings. In the experiment, sellers or firms compete against one another in a simulated consumer market exhibiting MA characteristics. The experimental results reveal that the Nash Equilibrium (NE) predictions of the game theoretic models may not hold in practice due to (i) market dominance of one firm over the other (ii) variations in market MA characteristics and (iii) differences in other payment system design features. The results of this dissertation not only offer insights about the strategic importance of online payment systems but also provide an explanation as to how economic and behavioral aspects of digital consumption may interact with one another.