When Should Firms Offer Free Trials?

Monic Jiayin Sun ()

No WP2006-062, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: A monopolist can offer free samples or free returns to let consumers try his product. When the cost of offering free trials is negligible, the standard theory (Milgrom 1981, Grossman 1981) predicts unraveling: the monopolist always offers them to reveal his product’s quality. I show that when products differ in vertical quality and a horizontal attribute, unraveling may not occur. When consumers know the product’s vertical quality, the monopolist offers free trials for a central region of horizontal attributes. He is less likely to offer free trials when quality is higher. Mandating free trials may hurt expected consumer welfare. When consumers do not know the product’s vertical quality, the monopolist is more likely to offer free trials when quality is higher. Nevertheless, he may not offer free trials even when his product has the highest possible vertical quality.

Pages: 30 pages
Date: 2006-12
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