Introductory pricing and subscription as signals

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. © 2022, Korean Econometric Society. All rights reserved.