The company you keep: qualitative uncertainty in the provision of a club good

Economics

Further details

Clubs are typically experience goods. Potential members cannot ascertain precisely beforehand their quality (dependent endogenously on the club's facility investment and number of users, itself dependent on the club's pricing policy). Members with unsatis- factory initial experiences discontinue visits. We show that a monopoly pro…t maximiser never o¤ers a free trial period for such goods but, for a quality function homogeneous of any feasible degree, a welfare maximiser always does. When the quality function is homogeneous of degree zero, the monopolist provides a socially excessive level of quality to repeat buyers. In other possible regimes, the monopolist permits too little club usage.