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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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    Citations

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    Cited by:

    1. Ramnath K. Chellappa & Shivendu Shivendu, 2005. "Managing Piracy: Pricing and Sampling Strategies for Digital Experience Goods in Vertically Segmented Markets," Information Systems Research, INFORMS, vol. 16(4), pages 400-417, December.
    2. Bipasa Datta & Clive D. Fraser, 2017. "The company you keep: Qualitative uncertainty in providing a club good," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(4), pages 763-788, August.
    3. 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.
    4. 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.
    5. 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.
    6. J. Miguel Villas-Boas, 2000. "Competing with Experience Goods," Econometric Society World Congress 2000 Contributed Papers 0771, Econometric Society.
    7. 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.
    8. Julia Cage & Dorothée Rouzet, 2015. "Improving “National Brands”: Reputation for Quality and Export Promotion Strategies," SciencePo Working papers Main hal-01167909, HAL.
    9. Roe, Brian E. & Sheldon, Ian M., 2001. "The Impacts of Labeling on the Production and Trade of Vertically Differentiated Goods with Process Attributes," 2001 Annual meeting, August 5-8, Chicago, IL 20451, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    10. Gustavo Yamada & Pablo Lavado, 2018. "Labor market consequences of the college boom around the world," IZA World of Labor, Institute of Labor Economics (IZA), pages 165-165, December.
    11. Robert E. Martin, 2011. "The College Cost Disease," Books, Edward Elgar Publishing, number 14179.
    12. Ali, Mazhar & Amir, Dr.Huma & Shamsi, Dr.Aamir, 2021. "Consumer Herding Behavior in Online Buying: A Literature Review," MPRA Paper 107435, University Library of Munich, Germany.
    13. 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.
    14. J. Miguel Villas‐Boas, 2006. "Dynamic Competition with Experience Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 37-66, March.
    15. Navarro, Noemí, 2012. "Price and quality decisions under network effects," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 263-270.
    16. Chang, Eunmi & Chin, Hyun, 2018. "Signaling or experiencing: Commitment HRM effects on recruitment and employees' online ratings," Journal of Business Research, Elsevier, vol. 84(C), pages 175-185.
    17. repec:spo:wpmain:info:hdl:2441/2si2or72bc8ed899298h75877i is not listed on IDEAS
    18. García Ramos, Yboon & Flores-Bazán, Fabian & Nicolas Hadjisavvas, 2017. "About the sum of quasiconvex functions," Working Papers 17-07, Centro de Investigación, Universidad del Pacífico.
    19. 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.
    20. 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.
    21. Busby, J.S., 2019. "The co-evolution of competition and parasitism in the resource-based view: A risk model of product counterfeiting," European Journal of Operational Research, Elsevier, vol. 276(1), pages 300-313.
    22. 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.
    23. Julia Cage & Dorothée Rouzet, 2015. "Improving “National Brands”: Reputation for Quality and Export Promotion Strategies," SciencePo Working papers hal-01167909, HAL.
    24. repec:hal:spmain:info:hdl:2441/2si2or72bc8ed899298h75877i is not listed on IDEAS
    25. Krähmer, Daniel, 2002. "Entry and experimentation in oligopolistic markets for experience goods [Markteintritt und Experimentation in oligopolistischen Märkten für Erfahrungsgüter]," Discussion Papers, Research Unit: Market Processes and Governance FS IV 02-13, WZB Berlin Social Science Center.

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