Technical Note—Signaling Product Quality Through a Trial Period
Shouqiang Wang, Gülru F. Özkan-Seely
Operations Research · 2018 · Volume 66 · Issue 2
Abstract
It has become a ubiquitous practice for firms that sell new products, such as software, to offer consumers time-locked product trial periods free of charge. We identify trial length as a nuanced signaling instrument, which, together with the price signal, a firm can use to communicate proprietary information about its product quality. We show that a high-quality firm offers a longer trial period and sets a higher price, and is rewarded with a higher profit, relative to its low-quality counterpart. Our finding extends to cases where the firm faces ex ante heterogeneous consumers or when the firm competes with an incumbent product. The electronic companion is available at https://doi.org/10.1287/opre.2017.1675 .
Keywords
trial length, price, quality signal, Bayesian learning
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