Behavior-based pricing and signaling of product quality

Jianpei Li and Wanzhu Zhang

MPRA Paper from University Library of Munich, Germany

Abstract: In a two-period model with repeat purchase, we compare the profit and social welfare effects of behavior-based pricing (BBP) and uniform pricing in a monopoly under quality uncertainty. We offer the novel insight that BBP increases the price elasticity of imitation demand and lowers the signaling cost relative to uniform pricing, and becomes a potentially profitable strategy even when the monopolist cannot commit to future prices. Moreover, the profitability of BBP does not arise at the expense of consumer surplus. Either upward or downward price distortion with use of BBP signals high quality, depending on the seller’s commitment power. With more accurate tracking technology, the monopolist may forsake signaling for better consumer information.

Keywords: Behavior-Based Pricing (BBP); Uniform Pricing; Quality Uncertainty; Signaling (search for similar items in EconPapers)
JEL-codes: D82 L11 L15 M31 (search for similar items in EconPapers)
Date: 2022-01-17, Revised 2023-01-03
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