Competing with Experience Goods
AbstractIn several markets consumers can only gain further information regarding about how well a product fits their preferences by experiencing it after the purchase. Furthermore, while some consumers may have a better fit with one given product, other consumers may end up appreciating more another product. In addition, firms may not have any significant private information regarding which consumers value more or less their own product. In such markets, consumers then try products and only keep on buying them if they provide a good fit. Furthermore, after trying a product a product a consumer has more information about that product than about the untried products. These features generate, in general, dynamic effects because the market shares in one period affect demands in the next period. The paper finds that if the distribution of valuations for each product is negatively (positively) skewed a firm benefits (is hurt) in the future from having a greater market share today. The negativity of the skewness of the distribution of valuations is then shown to be related to consumer risk aversion with respect to the physical performance of the good. With negative skewness it is shown in a two-period model that, as expected, firms compete more aggressively in the first period, and charge higher prices in the last period. The analysis of the infinite-horizon case with overlapping generations of consumers shows that these two effects average out in higher prices. In this later case, I also characterize oscillating market share dynamics, and comparative statics of the equilibrium with respect to degree of skewness, consumer and firm patience, and importance of the experience in the ex-post valuation of the product.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0771.
Date of creation: 01 Aug 2000
Date of revision:
Contact details of provider:
Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tülin Erdem & Michael P. Keane, 1996. "Decision-Making Under Uncertainty: Capturing Dynamic Brand Choice Processes in Turbulent Consumer Goods Markets," Marketing Science, INFORMS, vol. 15(1), pages 1-20.
- Hoerger, Thomas J., 1993. "Two-part pricing for experience goods in the presence of adverse selection," International Journal of Industrial Organization, Elsevier, vol. 11(4), pages 451-474.
- Kim, Jae-Cheol, 1992. "Experience Goods, Expectations and Pricing," The Economic Record, The Economic Society of Australia, vol. 68(200), pages 7-15, March.
- Beggs, Alan W & Klemperer, Paul, 1992.
"Multi-period Competition with Switching Costs,"
Econometric Society, vol. 60(3), pages 651-66, May.
- Schmalensee, Richard., 1980.
"Product differentiation advantages of pioneering brands,"
1140-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-65, June.
- Dirk Bergemann & Juuso Valimaki, 1996.
"Learning and Strategic Pricing,"
Cowles Foundation Discussion Papers
1113, Cowles Foundation for Research in Economics, Yale University.
- Dirk Bergemann & Juuso Valimaki, 1997.
"Market Diffusion with Two-Sided Learning,"
RAND Journal of Economics,
The RAND Corporation, vol. 28(4), pages 773-795, Winter.
- Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 515-39, October.
- Riordan, Michael H, 1986. "Monopolistic Competition with Experience Goods," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 265-79, May.
- Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
- Peter M. Guadagni & John D. C. Little, 1983. "A Logit Model of Brand Choice Calibrated on Scanner Data," Marketing Science, INFORMS, vol. 2(3), pages 203-238.
- Bagwell, Kyle, 1990.
"Informational product differentiation as a barrier to entry,"
International Journal of Industrial Organization,
Elsevier, vol. 8(2), pages 207-223, June.
- Kyle Bagwell, 1986. "Informational Product Differentiation as a Barrier to Entry," Discussion Papers 711, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Caminal, Ramon & Matutes, Carmen, 1990. "Endogenous switching costs in a duopoly model," International Journal of Industrial Organization, Elsevier, vol. 8(3), pages 353-373, September.
- Gurumurthy Kalyanaram & William T. Robinson & Glen L. Urban, 1995. "Order of Market Entry: Established Empirical Generalizations, Emerging Empirical Generalizations, and Future Research," Marketing Science, INFORMS, vol. 14(3_supplem), pages G212-G221.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.