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Markets for Experience Goods with Performance Uncertainty

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  • Julia Liebeskind
  • Richard P. Rumelt

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.

Suggested Citation

  • Julia Liebeskind & Richard P. Rumelt, 1989. "Markets for Experience Goods with Performance Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 601-621, Winter.
  • Handle: RePEc:rje:randje:v:20:y:1989:i:winter:p:601-621
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. Christian Terwiesch & Christoph H. Loch, 2004. "Collaborative Prototyping and the Pricing of Custom-Designed Products," Management Science, INFORMS, vol. 50(2), pages 145-158, February.
    3. Alessandro Acquisti, 2014. "Inducing Customers to Try New Goods," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 44(2), pages 131-146, March.
    4. J. Miguel Villas-Boas, 2000. "Competing with Experience Goods," Econometric Society World Congress 2000 Contributed Papers 0771, Econometric Society.
    5. 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.
    6. Robert E. Martin, 2011. "The College Cost Disease," Books, Edward Elgar Publishing, number 14179, April.
    7. Navarro, Noemí, 2012. "Price and quality decisions under network effects," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 263-270.
    8. Cagé, Julia & Rouzet, Dorothée, 2015. "Improving “national brands”: Reputation for quality and export promotion strategies," Journal of International Economics, Elsevier, vol. 95(2), pages 274-290.
    9. Nelson Oviedo & Gustavo Yamada, 2017. "Educación superior y subempleo profesional, ¿Una creciente burbuja mundial?," Working Papers 1609, Departamento de Economía, Universidad del Pacífico, revised Feb 2017.
    10. D Vandegrift, 2001. "Quality-Assuring Price And Breach Of Express Or Implied Warranty," Contemporary Economic Policy, Western Economic Association International, vol. 19(2), pages 186-196, April.
    11. 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.
    12. 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.
    13. Png, I P L & Reitman, David, 1995. "Why Are Some Products Branded and Others Not?," Journal of Law and Economics, University of Chicago Press, vol. 38(1), pages 207-224, April.

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