Monopoly Pricing of Experience Goods

Abstract

We develop a dynamic model of experience goods pricing with independent private valuations. We show that the optimal paths of sales and prices can be described in terms of a simple dichotomy. In a mass market, prices are declining over time. In a niche market, the optimal prices are initially low followed by higher prices that extract surplus from the buyers with a high willingness to pay. We consider extensions of the model to integrate elements of social rather than private learning and turnover among buyers.

Keywords: Monopoly, dynamic pricing, learning, experience goods, continuous time, Markov perfect equilibrium

JEL Classification: D81, D83