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Dynamic Competition with Experience Goods

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Author Info

  • J. Miguel Villas-Boas

Abstract

"This paper considers dynamic competition in the case in which consumers are only able to learn about their preferences for a certain product after experiencing it. After trying a product a consumer has more information about that product than about untried products. When competing in such a market firms with more sales in the past have an informational advantage because more consumers know their products. If products provide a better-than-expected fit with greater likelihood, taking advantage of that informational advantage may lead to an informational disadvantage in the future. This paper considers this competition with an infinite horizon model in a duopoly market with overlapping generations of consumers. Two effects are identified: On one hand marginal forward-looking consumers realize that by purchasing a product in the current period will be charged a higher expected price in the future. This effect results in reduced price sensitivity and higher equilibrium prices. On the other hand, forward-looking firms realize that they gain in the future from having a greater market share in the current period and compete more aggressively in prices. For similar discount factors for consumers and firms, the former effect is more important, and prices are higher the greater the informational advantages. The paper also characterizes oscillating market share dynamics, and comparative statics of the equilibrium with respect to consumer and firm patience, and the importance of the experience in the ex post valuation of the product." Copyright 2006, The Author(s) Journal Compilation (c) 2006 Blackwell Publishing.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 15 (2006)
Issue (Month): 1 (03)
Pages: 37-66

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Handle: RePEc:bla:jemstr:v:15:y:2006:i:1:p:37-66

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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Citations

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Cited by:
  1. Alexia Gaudeul, 2008. "Software Marketing on the Internet: the Use of Samples and Repositories," Working Papers 08-23, Centre for Competition Policy, University of East Anglia.
  2. Dirk Bergemann & Juuso Valimaki, 2004. "Monopoly Pricing of Experience Goods," Cowles Foundation Discussion Papers 1463R, Cowles Foundation for Research in Economics, Yale University, revised May 2005.
  3. Ramón Caminal & Adina Claici, 2005. "Are loyalty-rewarding pricing schemes anti-competitive?," Working Papers 228, Barcelona Graduate School of Economics.
  4. Luis Cabral, 2012. "Switching Costs and Equilibrium Prices," Working Papers 12-04, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Neeraj Arora & Xavier Dreze & Anindya Ghose & James Hess & Raghuram Iyengar & Bing Jing & Yogesh Joshi & V. Kumar & Nicholas Lurie & Scott Neslin & S. Sajeesh & Meng Su & Niladri Syam & Jacquelyn Thom, 2008. "Putting one-to-one marketing to work: Personalization, customization, and choice," Marketing Letters, Springer, vol. 19(3), pages 305-321, December.
  6. Toker Doganoglu, 2010. "Switching costs, experience goods and dynamic price competition," Quantitative Marketing and Economics, Springer, vol. 8(2), pages 167-205, June.
  7. Eric Anderson & Nanda Kumar, 2007. "Price competition with repeat, loyal buyers," Quantitative Marketing and Economics, Springer, vol. 5(4), pages 333-359, December.
  8. Bipasa Datta & Clive D Fraser, 2006. "The Company You Keep: Qualitative Uncertainty in Providing Club Goods," Discussion Papers 06/21, Department of Economics, University of York.
  9. Richards, Timothy J. & Patterson, Paul M. & Hamilton, Stephen F., 2007. "Fast Food, Addiction, and Market Power," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 32(03), December.
  10. Alessandro Bonatti, 2011. "Menu Pricing and Learning," American Economic Journal: Microeconomics, American Economic Association, vol. 3(3), pages 124-63, August.
  11. De Nijs, Romain & Rhodes, Andrew, 2013. "Behavior-based pricing with experience goods," Economics Letters, Elsevier, vol. 118(1), pages 155-158.
  12. Amir Heiman, 2010. "The economics of demonstrations: The effect of competition on demonstration and pricing strategies," Marketing Letters, Springer, vol. 21(4), pages 351-363, December.
  13. Ching, Andrew & Ishihara, Masakazu, 2007. "The Effects of Detailing on Prescribing Decisions under Two-Sided Learning," MPRA Paper 4935, University Library of Munich, Germany.

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