Competition with Asymmetric Experience Uncertainty

Michael R. Galbreth, Bikram Ghosh

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

The value of an experience good is idiosyncratic to consumers and is not fully realized until after a purchase is made. This uncertainty related to experience, or “experience uncertainty,” has been shown in prior research to have important implications in a competitive context. In this article, we consider two firms that are asymmetric along two dimensions—base quality and the distribution of experience uncertainty. The interaction of these asymmetries shapes consumer demand and thus is an important driver of the equilibrium strategies of competing firms. We show that an increase in the experience uncertainty of one competitor might in fact lead to higher profits for both firms, including the firm whose product has become less certain to consumers. These unexpected results can be understood by examining how experience uncertainty drives endogenous market segmentation and price elasticity. We provide simple conditions under which more experience uncertainty can increase the profits of both competing firms.

Original languageEnglish (US)
Pages (from-to)990-1012
Number of pages23
JournalDecision Sciences
Volume48
Issue number5
DOIs
StatePublished - Oct 2017
Externally publishedYes

Keywords

  • Competition
  • Experience goods
  • Experience uncertainty

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Strategy and Management
  • Information Systems and Management
  • Management of Technology and Innovation

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