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Behavior-based pricing and signaling of product quality

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

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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.

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