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Monopoly Pricing of Experience Goods

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Abstract

We develop a dynamic model of experience goods pricing with independent private valuations. We show that the optimal paths of sales and prices can be described in terms of a simple dichotomy. In a mass market, prices are declining over time. In a niche market, the optimal prices are initially low followed by higher prices that extract surplus from the buyers with a high willingness to pay. We consider extensions of the model to integrate elements of social rather than private learning and turnover among buyers.

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File URL: http://cowles.econ.yale.edu/P/cd/d14b/d1463-r.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1463R.

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Length: 46 pages
Date of creation: Jun 2004
Date of revision: May 2005
Publication status: Published in Journal of Political Economy (2006), 114(4): 713-743
Handle: RePEc:cwl:cwldpp:1463

Note: CFP 1175
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

Related research

Keywords: Monopoly; dynamic pricing; learning; experience goods; continuous time; Markov perfect equilibrium;

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References

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  1. J. Miguel Villas-Boas, 2006. "Dynamic Competition with Experience Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 37-66, 03.
  2. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers 709, Cowles Foundation for Research in Economics, Yale University.
  3. Keller, Godfrey & Rady, Sven, 2003. " Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 138-65, Spring.
  4. Gregory S. Crawford & Matthew Shum, 2005. "Uncertainty and Learning in Pharmaceutical Demand," Econometrica, Econometric Society, vol. 73(4), pages 1137-1173, 07.
  5. Judd, Kenneth L & Riordan, Michael H, 1994. "Price and Quality in a New Product Monopoly," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 773-89, October.
  6. Ching, Andrew T., 2010. "Consumer learning and heterogeneity: Dynamics of demand for prescription drugs after patent expiration," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 619-638, November.
  7. 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.
  8. Bhattacharya, Jayanta & Vogt, William B, 2003. "A Simple Model of Pharmaceutical Price Dynamics," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 599-626, October.
  9. J. Miguel Villas-Boas, 2004. "Consumer Learning, Brand Loyalty, and Competition," Marketing Science, INFORMS, vol. 23(1), pages 134-145, December.
  10. Sobel, Joel, 1991. "Durable Goods Monopoly with Entry of New Consumers," Econometrica, Econometric Society, vol. 59(5), pages 1455-85, September.
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Citations

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Cited by:
  1. Ed Hopkins, 2006. "Adaptive Learning Models of Consumer Behaviour," Levine's Bibliography 122247000000000658, UCLA Department of Economics.
  2. 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.
  3. Villas-Boas, Sofia B & Villas-Boas, Miguel, 2006. "Learning, Forgetting, and Sales," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7td275hv, Department of Agricultural & Resource Economics, UC Berkeley.

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