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When Should Firms Offer Free Trials?

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Author Info
Monic Jiayin Sun ()
Abstract

A monopolist can offer free samples or free returns to let consumers try his product. When the cost of offering free trials is negligible, the standard theory (Milgrom 1981, Grossman 1981) predicts unraveling: the monopolist always offers them to reveal his product’s quality. I show that when products differ in vertical quality and a horizontal attribute, unraveling may not occur. When consumers know the product’s vertical quality, the monopolist offers free trials for a central region of horizontal attributes. He is less likely to offer free trials when quality is higher. Mandating free trials may hurt expected consumer welfare. When consumers do not know the product’s vertical quality, the monopolist is more likely to offer free trials when quality is higher. Nevertheless, he may not offer free trials even when his product has the highest possible vertical quality.

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File URL: http://www.bu.edu/econ/workingpapers/papers/trials.pdf
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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-062.

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Length: 30 pages
Date of creation: Dec 2006
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Handle: RePEc:bos:wpaper:wp2006-062

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  1. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law & Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
  2. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr. [Downloadable!] (restricted)
  3. Simon P. Anderson & Régis Renault, 2006. "Advertising Content," American Economic Review, American Economic Association, vol. 96(1), pages 93-113, March. [Downloadable!]
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  4. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn. [Downloadable!] (restricted)
    Other versions:
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This page was last updated on 2009-11-4.

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