Dynamic Pricing of Experience Goods in Markets with Demand Uncertainty
38 Pages Posted: 20 Sep 2016 Last revised: 1 Nov 2018
Date Written: February 1, 2017
This paper studies a firm’s optimal dynamic pricing strategies for its new experience goods in markets where the distribution of consumers’ valuations is ex ante unknown. We examine whether and how the firm facing information asymmetry and demand uncertainty can signal its high quality and learn market demand through its pricing strategy. First, we find that a high-quality firm can credibly reveal its true quality in the early period with either a skimming-pricing strategy or a penetration-pricing strategy under different conditions. Second, though a high-quality firm can benefit more from learning market demand than a low-quality firm, the high-quality firm may in equilibrium adopt a penetration-pricing strategy to forgo the benefit of learning demand in order to separate from the low-quality firm, who would adopt a skimming strategy to learn market demand. Third, although consumers have higher willing-to-pay for a high-quality product, the high-quality firm may in equilibrium charge a lower initial price than the low-quality firm. Fourth, interestingly, the high-quality firm may earn higher profits when its initial price is made under demand uncertainty than under no uncertainty. Lastly, with perfect social learning (i.e., in the later period, all consumers can learn the firm’s quality from earlier customers), the high-quality firm can in equilibrium signal its quality and learn market demand by adopting a skimming strategy.
Keywords: dynamic signaling, experience goods, demand uncertainty, pricing, learning
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