Pricing Experience Goods in Information Good Markets: The Case of eBusiness Service Providers

Shane Greenstein*, Sarit Markovich

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

We study the pricing strategies of firms providing a service in experience good markets with switching costs. Using data on vendors providing "hosting and related services" at an early stage of the market, we test for pricing distortions that follow from oligopolistic competition with quality uncertainty and switching costs. We find that firms with a brand name charge a premium for their product - leveraging the reputation accumulated in closely related markets. As the theoretical literature suggests, we also find that the type of pricing distortions along the product line depends on consumers' expectations about quality. If consumers underestimate the quality of the product, firms behave as if they discount introductory contracts in order to build trust, and later on markup upgraded contract. In contrast, firms that offer a quality level that is lower than consumers' expectations markup initial contracts while discounting upgraded ones.

Original languageEnglish (US)
Pages (from-to)119-139
Number of pages21
JournalInternational Journal of the Economics of Business
Volume19
Issue number1
DOIs
StatePublished - Feb 1 2012

Keywords

  • Electronic Business
  • Information Goods
  • Pricing Strategies

ASJC Scopus subject areas

  • Business, Management and Accounting (miscellaneous)
  • Economics and Econometrics

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