Optimal Contracting of New Experience Goods

20 Pages Posted: 8 Aug 2008 Last revised: 12 Aug 2008

Date Written: August 4, 2008

Abstract

We model new experience goods in the context of dynamic mechanism design. These are goods for which an agent is unsure of her valuation but can learn it through consumption experience. We consider a dynamic environment with a single buyer and seller in which contracting occurs over T periods, where each time the agent consumes the object, she receives a signal which allows her to revise her valuation. In this setting, experimentation with the product is strategic both for the buyer and seller. We derive the efficient and seller optimal contracts and compare them. We present a simple two period example which highlights some of the key features of the model. Finally, the methodology developed in the paper can be used to design efficient and optimal contracts in a multi-buyer setting with learning, where each buyer has single unit demand and there is a single object for sale in each period.

Keywords: Dynamic mechanism design, new experience goods, bandit problems

JEL Classification: C73, D44, D82, D83

Suggested Citation

Deb, Rahul, Optimal Contracting of New Experience Goods (August 4, 2008). Available at SSRN: https://ssrn.com/abstract=1208682 or http://dx.doi.org/10.2139/ssrn.1208682

Rahul Deb (Contact Author)

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

HOME PAGE: http://www.economics.utoronto.ca/debrahul/

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