COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1463

Monopoly Pricing of Experience Goods

Dirk Bergemann and Juuso Välimäki

June 2004

In this paper, we develop a model of experience goods pricing with independent private valuations. We show that the optimal paths of sales and prices take qualitatively different shapes for different products. If the buyers are initially optimistic, then the prices are declining over time. If the buyers are initially pessimistic, then the optimal prices are initially low followed by higher prices that extract goodwill from the buyers with a high willingness to pay.

We also characterize the optimal commitment price path for the monopolist and the steady state equilibrium when there is turnover on the buyer side of the market.

Keywords: Monopoly, dynamic pricing, learning, experience goods, continuous time, Markov perfect equilibrium

JEL Classification: D81, D83