Fan Li

China Center for Special Economic Zone Research, Shenzhen University

Nanhai Ave 3688, Shenzhen, Guangdong, 518060, China

Email: lifan@szu.edu.cn

Zelong Yi(Corresponding author)

Department of Transportation Economics and Logistics Management, College of Economics, Shenzhen University

Nanhai Ave 3688, Shenzhen, Guangdong, 518060, China

Email: yizl@szu.edu.cn

Fan Li is an associate professor in China Center for Special Economic Zone Research at Shenzhen University. She has a PhD in economics from University of Florida. Her research focuses on information economics and industrial organization.

Zelong Yi is an assistant professor in Department of Transportation Economics and Logistics Management, College of Economics at Shenzhen University. He holds a PhD in operations management from Hong Kong University of Science and Technology. His research focuses on supply chain management, customer behavior, and information economics.

Abstract

Many software and video game firms offer free trials with limited content to help buyers assess the likely value of the goods that they may purchase. This paper examines fundamental issues related to the incentives and risks for a monopoly by providing a trial. Assuming that a seller can control the mix of components in a trial, we introduce a new mechanism for buyers’ inference of using a trial. We find that a trial may enable the seller to segment the market and charge a higher price to high-valuation buyers, but can also cause a decline in demand. Moreover, the seller forfeits partial value of a full product through providing a free trial, so the benefit is offset by this cannibalization loss. In addition to the size and content of a trial, the distribution of buyers’ prior belief also affects a trial’s ability to convey information. We show that a trial can provide more information if the prior belief is more concentrated in the tails of the distribution.

Keywords: trial, information release, signaling effect, cannibalization effect