Probabilistic Selling in Quality-Differentiated Markets

Zelin Zhang (), Kissan Joseph () and Ramanathan Subramaniam ()
Additional contact information
Zelin Zhang: Renmin University of China, Haidian, 100872 Beijing, China
Kissan Joseph: University of Kansas, Lawrence, Kansas 66045
Ramanathan Subramaniam: Indian Institute of Management, Ahmedabad, Vastrapur, Ahmedabad 380015, India

Management Science, 2015, vol. 61, issue 8, 1959-1977

Abstract: Probabilistic selling—the sale of synthetic products consisting of a lottery between two distinct goods—has been extensively analyzed in horizontal markets. In this research, we investigate probabilistic selling in quality-differentiated markets. This is an important new dimension of inquiry because of the widespread prevalence of quality-differentiated markets as well as significant differences in the preference structure across these markets. In fact, this latter consideration casts doubt as to whether probabilistic selling will even emerge in quality-differentiated markets. We find that probabilistic selling emerges in quality-differentiated markets as a way to profitably dispose excess capacity; moreover, probabilistic selling remains viable even under endogenous quality choice. In addition, in markets where sellers employ “strong” quality differentiation, the introduction of an intermediate probabilistic good actually causes closer quality levels in a product line and enhances consumer welfare. In contrast, in markets where sellers employ “weak” quality differentiation, the introduction of an intermediate probabilistic good increases quality separation and degrades consumer welfare. Overall, we view our contribution as one of characterizing the optimality, implementation, and policy implications of probabilistic selling in quality-differentiated markets. This paper was accepted by Pradeep Chintagunta, marketing.

Keywords: pricing; services marketing; probabilistic selling; quality choice; quality-differentiated markets; product line design; welfare (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2014.1974 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:61:y:2015:i:8:p:1959-1977

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().