Buyer experimentation and introductory pricing

Abstract

We study the pricing decisions of a monopolist seller in a two-period model in which buyers and the seller are all uncertain about a good’s quality. We assume that buyers not only learn from experience, but also may experiment, that is, increase the amount of information by consuming more. We define an introductory price to be a first period equilibrium price lower than that which maximizes period 1 profit. The motivation for introductory pricing is that, under certain conditions, the seller prefers its buyers to be better informed about quality. A lower initial price increases consumption and hence information. We consider two versions of the model: identical buyers with a public signal of quality; heterogeneous buyers who each receive a private quality signal.