Two-part pricing for experience goods in the presence of adverse selection

Abstract

Because customers learn something when they purchase an experience good for the first time, a firm selling experience goods may face different demand curves from new and repeat customers. The firm can exploit these differences by using a two-part pricing strategy to price discriminate between new and repeat customers. The firm may also use a two-part pricing strategy to mitigate the information problems of adverse selection when its quality is uncertain. The analysis is particularly applicable to service markets, where customers and firms seek long-term relationships and firms maintain customer records which facilitate price discrimination.