Foundations of the Preisach Operator in Real Options Problems with Subscription Cost and Heterogeneous Population of Consumers

This paper considers the pricing of a subscription service in a heterogeneous market with consumers having different discount rates. We show that in the case of non-zero enrollment/cancellation cost, solutions of the HJB equation naturally contain an equivalent of the well-known Preisach operator, a fundamental model of hysteresis in engineering applications. Singular perturbation expansions are used to approximate the optimal solution, assuming that enrollment/cancellation costs are small relative to the total subscription cost. As a case study, we consider and compare markets with one and two consumers.