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Pricing Experience Goods in Information Good Markets: The Case of eBusiness Service Providers

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  • Shane Greenstein
  • Sarit Markovich

Abstract

We study the pricing strategies of firms providing a service in experience good markets with switching costs. Using data on vendors providing “hosting and related services” at an early stage of the market, we test for pricing distortions that follow from oligopolistic competition with quality uncertainty and switching costs. We find that firms with a brand name charge a premium for their product -- leveraging the reputation accumulated in closely related markets. As the theoretical literature suggests, we also find that the type of pricing distortions along the product line depends on consumers’ expectations about quality. If consumers underestimate the quality of the product, firms behave as if they discount introductory contracts in order to build trust, and later on markup upgraded contract. In contrast, firms that offer a quality level that is lower than consumers’ expectations markup initial contracts while discounting upgraded ones .

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  • Shane Greenstein & Sarit Markovich, 2012. "Pricing Experience Goods in Information Good Markets: The Case of eBusiness Service Providers," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 19(1), pages 119-139, February.
    • Handle: RePEc:taf:ijecbs:v:19:y:2012:i:1:p:119-139
    DOI: 10.1080/13571516.2012.642643
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    References listed on IDEAS

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    1. Alan G. White & Jaison R. Abel & Ernst R. Berndt & Cory W. Monroe, 2010. "Hedonic Price Indexes for Personal Computer Operating Systems and Productivity Suites," NBER Chapters, in: Contributions in Memory of Zvi Griliches, pages 787-807, National Bureau of Economic Research, Inc.
    2. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 31, pages 1967-2072, Elsevier.
    3. Zvi Griliches, 1961. "Hedonic Price Indexes for Automobiles: An Econometric of Quality Change," NBER Chapters, in: The Price Statistics of the Federal Goverment, pages 173-196, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Kevin J. Boudreau & Lars Bo Jeppesen & Milan Miric, 2022. "Competing on freemium: Digital competition with network effects," Strategic Management Journal, Wiley Blackwell, vol. 43(7), pages 1374-1401, July.
    2. Raymond K. Wong, 2013. "Feasibility and a case study on content optimization services on cloud," Information Systems Frontiers, Springer, vol. 15(4), pages 525-532, September.

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