Markets for Experience Goods with Performance Uncertainty

Julia Liebeskind and Richard P. Rumelt

RAND Journal of Economics, 1989, vol. 20, issue 4, 601-621

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.

Date: 1989
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