Comments and Discussions on Maria Martin-Rodriguez’s “A Dynamic Monopoly withExperience Good and Risk-Averse Consumers”
Makoto Hanazono
Graduate School of Economics, Nagoya University
1.

SummaryThis paper provides a theoretical study on monopoly’s dynamic pricing withexperience goods. Consumers are assumed to be risk-averse, and their willingness
to pay for a good with uncertain quality is reduced due to the risk premium.
Consumers are also assumed to be myopic: they maximize utility each period
independently.
The main question of this paper is, Does the monopolist make “introductory
price offer” and how likely? The author finds that the monopolist’s incentive ofcharging low price at the initial period depends on the degree of risk-aversion. If thedegree is high, the cost of experimentation (larger consumption of goods withuncertain quality) becomes high. This implies that, for a given level ofexperimentation, the higher is the risk-aversion, the lower the initial price offer.
In the subsequent period, the monopolist favors the experienced customers since
they are now informed and thus no risk premium is needed. However, thesubsequent price can be lower than the initial offer since the realized quality can bevery low. This pricing pattern happens more likely if the initial price offer is higher(by lower risk-aversion).
The main result of this paper is that the introductory price offer is more likely
to be observed if the degree of risk aversion is higher. On the welfare issue, theauthor finds that the monopolist’s optimal level of experimentation tends to belower than social optimum. Thus, she finds that a price cap in the initial period
increases welfare.

2.

Comments and Discussions
Although many previous papers study the dynamic pricing pattern of monopoly,and especially the possibility of introductory pricing offers, the current paper is, tothe best of my knowledge, the first attempt to include consumers’ risk-aversion in
the picture. The presence of uncertainty and risk aversion seems reasonable, as theauthor argues, when an unprecedented new product (like Apple Watch) is marketed.
With the introduction of risk-aversion, this paper provides valuable, novel
predictions and policy implications.
This paper’s approach is also remarkable. The analysis is built on a solid gametheoretic foundation, in particular on signaling games. To avoid complication, theauthor assumes that consumers are myopic. I think this approach abstracts
consumer’s risk concern from other factors like learning. Anyway the model andanalysis are simple and polished for the questions posed.
There are several possibilities for further research on this issue. First, it would
be interesting to consider individual learning of information by consumers (thispaper indeed incorporates a kind of social learning already). Some of the consumersunder experimentation might find it beneficial to stop buying the good at thebeginning and to learn from others about the quality of good. Second, it would also
be interesting to consider competition of firms. We often observe that firms follow
the innovator by imitating the products. Thus introducing followers in thesubsequent stage and competition among the innovator and followers is reasonable.
The innovator should have incentive to create switching costs in the earlier stage.
Third, I think it is reasonable to assume that the monopolist has superior
information on the quality of the product before the market opens (at least withsome cost like market research). Hence, I wonder how this asymmetric information
affects the behavior of monopolist. Surely, signaling could occur. But theinformation may be partial, and thus the consumers’ risk concern might remains.
This looks quite complex but interaction of these things might open another door to
the better understanding of dynamic pricing issues.

The author presented this paper on December 21, 2015, in a seminar organized byJSPS Grant-in-Aid for Scientific Research (B) titled “Economic Analysis ofProcurement: Theory and Application” (Principal Investigator: Makoto Hanazono).
This JSPS project is aimed at investigating principles for improving private andpublic procurement under various informational and contractual problems, byutilizing recent developments in the studies of theoretical and empirical industrialorganization.