Information Spillovers in Experience Goods Competition

Trialing an experience good allows consumers to learn their value for the sampled good and also informs beliefs about their value for similar products. These demandside information spillovers across products create a relatively well-informed group of potential future consumers for rival firms. When both switching consumers and repeat buyers are profitable, firms face reduced incentives to set a low initial price to attract inexperienced consumers. Switchers and repeat buyers are more likely to be profitable in new product categories that build on major innovations and when firms can price discriminate based on purchasing history. We suggest that competing products and services arising from new innovations often have demand-side information spillovers from any product trial and are, hence, settings where competing firms can make overall profits even when selling products that consumers perceive to be indistinguishable prior to initial trial.

Automated summary

Trialing an experience good informs consumers’ beliefs about their value for similar products and creates a well-informed group of potential future consumers for rival firms. In new product categories that build on major innovations, firms can set a low initial price to attract inexperienced consumers, while still profiting from switchers and repeat buyers through price discrimination based on purchasing history. Competing products and services arising from new innovations can make overall profits even when selling products that consumers perceive to be indistinguishable prior to initial trial.