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Optimal Pricing of Experience Goods

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Author Info
Carl Shapiro

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Abstract

A monopolist's optimal price path over time is examined for situations in which consumers initially misestimate product quality and learn about it by using the good. Information about the product is bundled with the product itself. Two very different cases are studied. In the optimistic case, consumers initially overestimate quality, and the optimal way to milk a reputation is via a declining price path followed by a jump up to a terminal price. There are no long-run effects due to initial misperceptions. In the pessimistic case, consumers underestimate quality, and the optimal way to build a reputation is to use a low introductory price followed by a higher regular price. In this case, initial misperceptions adversely affect welfare in both the short and long run.

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Publisher Info
Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 14 (1983)
Issue (Month): 2 (Autumn)
Pages: 497-507
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Handle: RePEc:rje:bellje:v:14:y:1983:i:autumn:p:497-507

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  1. Bonroy, Olivier & Constantatos, Christos, 2003. "Consumer Uncertainty about which Firm Sells the High Quality: on the Slow Penetration of Some Credence Goods," Cahiers de recherche 0307, GREEN. [Downloadable!]
  2. Olivier Bonroy & Christos Constantatos, 2008. "On the use of labels in credence goods markets," Journal of Regulatory Economics, Springer, vol. 33(3), pages 237-252, June. [Downloadable!] (restricted)
    Other versions:
  3. J. Miguel Villas-Boas, 2000. "Competing with Experience Goods," Econometric Society World Congress 2000 Contributed Papers 0771, Econometric Society. [Downloadable!]
  4. Arthur Fishman & Rafael Rob, . ""Experimentation and Competition''," CARESS Working Papres 97-12, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences. [Downloadable!]
    Other versions:
  5. Jinhua Zhao & Catherine L. Kling, 2000. "Willingness-to-Pay, Compensating Variation, and the Cost of Commitment," Center for Agricultural and Rural Development (CARD) Publications 00-wp251, Center for Agricultural and Rural Development (CARD) at Iowa State University. [Downloadable!]
    Other versions:
  6. Maarten C.W. Janssen & Santanu Roy, 2007. "Signaling Quality Through Prices in an Oligopoly," Departmental Working Papers 0709, Southern Methodist University, Department of Economics, revised Nov 2008. [Downloadable!]
    Other versions:
  7. Ed Hopkins, 2004. "Adaptive Learning Models of Consumer Behaviour," ESE Discussion Papers 121, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
    Other versions:
  8. Kyle Bagwell & Michael Riordan, 1988. "High and Declining Prices Signal Product Quality," Discussion Papers 808, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
    Other versions:
  9. Welling, Michael & Krebs, Alexander & Graefe, Gernot, 2006. "Pandora’s Box: Does Electronic Commerce Increase the Optimal Amount of Fraud?," 99th Seminar, February 8-10, 2006, Bonn, Germany 7762, European Association of Agricultural Economists. [Downloadable!]
  10. Harabi, Najib, 1996. "Patents in Theory and Practice: Empirical Results from Switzerland," MPRA Paper 9606, University Library of Munich, Germany. [Downloadable!]
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