Working Paper: NBER ID: w28584
Authors: Zhuoqiong Charlie Chen; Christopher T. Stanton; Catherine Thomas
Abstract: When experience goods compete, consuming one product can be informative about value for similar untried products. We study a two-period model of duopoly competition in markets that have this feature and where firms can price discriminate between consumers based on purchasing history. Price dynamics, firm profits, and consumer surplus depend on how information spillovers shape demand from the consumers who have trialed the rival product—the potential switchers. In the first period, rather than competing intensely for all future profits, firms compete only for the difference in future profits between repeat and switching consumers. Demand-side information spillovers offer an explanation of how competing firms in new product markets can be profitable in all periods even when selling products that are indistinguishable ex ante.
Keywords: experience goods; information spillovers; duopoly competition; price discrimination
JEL Codes: D11; L1; L13; L15; L26; M21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trial consumption (D18) | consumer valuation (D46) |
| consumer valuation (D46) | likelihood of switching to a competitor's product (L15) |
| information spillovers (O36) | firm profits (L21) |
| information spillovers (O36) | consumer surplus (D46) |
| trial consumption (D18) | firm profits (L21) |
| consumer behavior (D19) | firm profits (L21) |
| correlation between consumer values (D11) | firm profits (L21) |