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Title: The Company You Keep: Qualitative Uncertainty in Providing a Club Good.
Authors: Datta, Bipasa
Fraser, Clive D.
First Published: 27-Mar-2017
Publisher: Wiley for Association for Public Economic Theory
Citation: Journal of Public Economic Theory, 2017, pp. 1-27
Abstract: 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 its prices). Members with unsatisfactory initial experiences discontinue visits. We show that a monopoly profit maximizer never offers a free trial period for such goods. For quality functions homogeneous of degree of at least minus one, a welfare maximizer, motivated by distributional concerns to mitigate disappointed consumers' losses, always does. We demonstrate the robustness of this finding by showing that (i) without qualitative uncertainty (thus, no disappointed customers), neither welfarist nor monopolist offers free trials; and (ii) if the planner pursues an objective mixing welfare maximization with profit maximization, the likelihood of free trials increases with the weight put on welfare maximization. Regarding club quality and usage, the monopolist provides a socially excessive level of quality to repeat buyers when the quality function is homogeneous of degree zero. With nonhomogeneous quality functions, the monopolist permits too little club usage; quality may or may not be socially excessive.
DOI Link: 10.1111/jpet.12244
ISSN: 1097-3923
eISSN: 1467-9779
Version: Post-print
Status: Peer-reviewed
Type: Journal Article
Rights: Copyright © 2017, Wiley for Association for Public Economic Theory. Deposited with reference to the publisher’s open access archiving policy.
Description: The file associated with this record is under embargo until 12 months after publication, in accordance with the publisher's self-archiving policy. The full text may be available through the publisher links provided above.
Appears in Collections:Published Articles, Dept. of Economics

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