Behavior-based pricing and signaling of product quality

Li, Jianpei and Zhang, Wanzhu (2022): Behavior-based pricing and signaling of product quality.

Abstract

We analyze the interaction between the signaling role of prices and a monopolist's incentive to use behavior-based pricing (BBP) in a two-period model with quality uncertainty. We obtain the novel insight that BBP increases the price elasticity of imitation demand, lowers the signaling cost relative to uniform pricing, and can be a profitable strategy, in sharp contrast to the classic result that BBP is not optimal for a monopolist. Either upward or downward price distortion with use of BBP signals high quality, depending on the seller's commitment power. With more accurate tracking technology, the seller forsakes signaling for better consumer information.

• Item Type: MPRA Paper
• Language: English
• Keywords: Behavior-Based Pricing (BBP); Uniform Pricing; Quality Uncertainty; Signaling
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality ; Standardization and Compatibility; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising > M31 - Marketing

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