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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society
Introductory pricing and subscription as signals
Vol.33, No.3, September 2022, 33–74
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Sung Hyun Kim
(Ewha Womans University)
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Abstract
We consider a series of signaling models of experience goods. In
the first model, the seller attempts to signal its quality by introductory pricing
in the trial phase in the hope of future profit. We identify plausible forms of
equilibria by applying the intuitive criterion. Then we expand the model horizon
to examine what happens after the trial phase. We show that when the product
is durable and requires costly maintenance, the price alone is not effective as a
signal of the seller’s long-livedness. A subscription scheme is suggested as an
effective instrument for ensuring long-term transaction. We also discuss interaction
between the two phases. These models can illuminate on recent business
practices, e.g. in the mobile applications market.
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Keywords
signaling model, perfect Bayesian equilibrium, intuitive criterion |
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D43, D83, L15 |
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