Uncharted Waters: Selling a New Product Robustly

TL;DR

This paper analyzes how sellers of new products choose pricing and information strategies to maximize guaranteed profits, considering buyer search costs and outside options, revealing impacts on pricing and information provision.

Contribution

It introduces a robust strategic framework for new product pricing and information disclosure, accounting for search costs and outside options, which was not previously modeled.

Findings

Providing information can deter search and increase demand.

Lower search costs can lead to higher prices and noisier information.

Robust strategies balance search deterrence and surplus extraction.

Abstract

When introducing a novel product, a seller sets a price and decides how much information to provide to a buyer, who may incur a search cost to discover an outside option. The buyer knows the outside option distribution; the seller knows only its mean and bounds. Seeking "robustness," the seller evaluates strategies based on guaranteed profits, balancing search deterrence against surplus extraction. Providing information can deter search and boost demand but requires offering the buyer a higher payoff via a lower price. Results help explain the variations in information provision among new products and suggest that lower search costs can raise prices and lead to noisier information, potentially harming consumers.