The Company You Keep: Qualitative Uncertainty in Providing Club Goods
Clubs are typically experience goods. Potential members cannot ascertain precisely beforehand their quality (dependent endogenously on the club's facility investment and number of users, itself dependent on its pricing policy). Members with unsatisfactory initial experiences discontinue visits. We show that a monopoly profit maximiser never offers a free trial period for such goods but, for a quality function homogeneous of any feasible degree, a welfare maximiser always does. When the quality function is homogeneous of degree zero, the monopolist provides a socially excessive level of quality to repeat buyers. In other possible regimes, the monopolist permits too little club usage.
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