Competition with Asymmetric Experience Uncertainty

The value of an experience good is idiosyncratic to consumers and is not fully realized until after a purchase is made. This uncertainty related to experience, or experience uncertainty, has been shown in prior research to have important implications in a competitive context. In this article, we consider two firms that are asymmetric along two dimensionsbase quality and the distribution of experience uncertainty. The interaction of these asymmetries shapes consumer demand and thus is an important driver of the equilibrium strategies of competing firms. We show that an increase in the experience uncertainty of one competitor might in fact lead to higher profits for both firms, including the firm whose product has become less certain to consumers. These unexpected results can be understood by examining how experience uncertainty drives endogenous market segmentation and price elasticity. We provide simple conditions under which more experience uncertainty can increase the profits of both competing firms.