Price Dynamics for Credence Products: Penetration and Skimming Strategies

Philippe Mahenc
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Philippe Mahenc: CEE-M - Centre d'Economie de l'Environnement - Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - UM - Université de Montpellier

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Abstract: This paper investigates a dynamic model of price signaling for a credence product of unknown social performance. A new entrant uses prices to reveal social responsibility and uphold reputability throughout a veri cation phase. In equilibrium, the signaling strategy involves penetration or skimming pricing depending on the competitive pressure faced by the entrant. Confronted with competition from conventional incumbents, the socially responsible entrant repeatedly charges low prices to penetrate the market. By contrast, in an untapped market, the socially responsible entrant repeatedly charges high prices to skim the cream o⁄ the top of the demand. In both cases, costly signaling is consistent with Veblen s law that conspicuous waste is an e⁄ective signal of reputability.

Keywords: Credence product; Penetration pricing; Signaling; Skimming pricing; Social responsibility (search for similar items in EconPapers)
Date: 2023-09-07
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Published in 10th FAERE annual conference, Sep 2023, Montpellier, France

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04217013

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