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Markets for Experience Goods with Performance Uncertainty

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  • Julia Liebeskind
  • Richard P. Rumelt
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    Abstract

    This article analyzes the market for experience goods when the product's quality is uncertain. Unlike the case of certain product quality, in this setting, a customer who receives a bad product cannot automatically infer that the producer has "cheated." In this two-period model, producers select either high- or low-quality technologies, and consumers individually decide whether or not to rebuy the product in the second period. The sequential equilibria involve mixed strategies in producer "honesty" and buyer "trust," and the form of these strategies under conditions of monopoly and competition is investigated. Unreasonable equilibria are eliminated by applying a form of Kohlberg and Mertens' invariance criterion. Several extensions are analyzed, including the use of first-period discounts and an infinite horizon model obtained by independent repetition of the two-period case.

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    Bibliographic Info

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

    Volume (Year): 20 (1989)
    Issue (Month): 4 (Winter)
    Pages: 601-621

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    Handle: RePEc:rje:randje:v:20:y:1989:i:winter:p:601-621

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    Cited by:
    1. Noemí Navarro, 2012. "Price and quality decisions under network effects," Cahiers de recherche 12-01, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
    2. Georg Meran & Reimund Schwarze, 2010. "Can minimum prices assure the quality of professional services?," European Journal of Law and Economics, Springer, vol. 30(2), pages 171-199, October.
    3. Haruvy, Ernan E. & Li, Tao & Sethi, Suresh P., 2012. "Two-stage pricing for custom-made products," European Journal of Operational Research, Elsevier, vol. 219(2), pages 405-414.
    4. Krahmer, Daniel, 2003. "Entry and experimentation in oligopolistic markets for experience goods," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1201-1213, October.
    5. J. Miguel Villas-Boas, 2000. "Competing with Experience Goods," Econometric Society World Congress 2000 Contributed Papers 0771, Econometric Society.
    6. 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.
    7. Alessandro Acquisti, 2014. "Inducing Customers to Try New Goods," Review of Industrial Organization, Springer, vol. 44(2), pages 131-146, March.

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