Modifying Customer Expectations of Price Decreases for a Durable Product

Abstract

We study the introductory signalling strategy for a durable product that faces optimistic expectations among customers about price declines over time. The firm introducing the product knows that experiential learning is low for the product. However, customers, being uncertain about the extent of experiential learning, assign a nonzero probability that the firm's new product will enjoy a high cost reduction with cumulative experience. The optimistic expectations of customers reduce their willingness to pay a high price at the product's introduction while predisposing them to buying later. The challenge facing the low-experience firm is to choose an introductory strategy that will credibly convey the low experience-curve effect to customers. We use the sequential equilibrium concept in a game-theoretic framework to identify the firm's signalling strategy. We identify the unique separating equilibrium of the game after refining the set of separating equilibria. We demonstrate that a high introductory price credibly signals the low experiential learning to customers. We also show that signalling causes an artificial learning-curve effect.