Competing with Experience Goods

J. Miguel Villas-Boas

No 771, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: In several markets consumers can only gain further information regarding about how well a product fits their preferences by experiencing it after the purchase. Furthermore, while some consumers may have a better fit with one given product, other consumers may end up appreciating more another product. In addition, firms may not have any significant private information regarding which consumers value more or less their own product. In such markets, consumers then try products and only keep on buying them if they provide a good fit. Furthermore, after trying a product a product a consumer has more information about that product than about the untried products. These features generate, in general, dynamic effects because the market shares in one period affect demands in the next period. The paper finds that if the distribution of valuations for each product is negatively (positively) skewed a firm benefits (is hurt) in the future from having a greater market share today. The negativity of the skewness of the distribution of valuations is then shown to be related to consumer risk aversion with respect to the physical performance of the good. With negative skewness it is shown in a two-period model that, as expected, firms compete more aggressively in the first period, and charge higher prices in the last period. The analysis of the infinite-horizon case with overlapping generations of consumers shows that these two effects average out in higher prices. In this later case, I also characterize oscillating market share dynamics, and comparative statics of the equilibrium with respect to degree of skewness, consumer and firm patience, and importance of the experience in the ex-post valuation of the product.

Date: 2000-08-01
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