Events

Management and Strategy Seminar

Speaker:

• Professor Yuk-fai Fong
  Professor
  Department of Economics
  Hong Kong University of Science and Technology

Abstract:

This paper presents a dynamic model for a monopolist who sells experience goods with both observable and experience attributes, which are interdependent in consumers' valuation. We call them complements (substitutes) if an increase in one attribute raises (lowers) the marginal value of the other attribute. Unlike in standard experience goods settings, deviation in quality typically takes two periods to complete, and in case of substitutes, deviation is proceeded by a V-shaped quality trend. In equilibrium, the observable attribute increases in the seller's discount factor when two attributes are complements, but decreases in the seller's discount factor when two attributes are substitutes. We also show that making only one out of two experience attributes publicly observable does not necessarily help trust building and may lead to a lower level of experience attribute and lower profit. Furthermore, the seller's commitment to the observable attribute facilitates the seller's ability to gain consumers' trust and yields higher profit. Quality commitment can be implemented through a minimum quality standard policy when the attributes are complements, but minimum quality standard is ineffective when attributes are substitutes.