Customer Recognition in Experience vs. Inspection Good Markets

Abstract

We study the effects of customer recognition and behavior-based price discrimination (BPD) in a two-period experience good duopoly with a discrete value distribution, and we investigate the role of consumers’ ex ante valuation uncertainty in dynamic price competition through comparison with an inspection good duopoly. Several results are reached. First, the firms may reward repeat purchase when the probability of a high value is relatively low and when the high–low value difference is large; otherwise, they may engage in poaching. Second, BPD frequently increases each firm’s total profits, even in the poaching equilibrium. These results contrast with the inspection good duopoly, and the driver is that consumers’ period 2 product preference depends on their realized values in period 1. Third, consumers’ ex ante valuation uncertainty may increase or decrease firm profits without BPD, and it weakly increases firm profits with BPD, relative to the inspection good duopoly. This paper was accepted by J. Miguel Villas-Boas, marketing.