"Pricing Decisions of Skill-Based Products: The Role of Used-Product Markets," Journal of Revenue and Pricing Management
Authors: Qiu, Chun; Messinger, Paul R.
Publication: Journal of Revenue and Pricing Management, April 2014
The consumption of skill-based products (SBPs), such as musical instruments, sports equipment and photographic equipment, requires consumers to possess requisite skills. Yet, only through product usage can one learn to master such skills, despite the fact that not everyone can succeed in the learning. Hence, some beginners have a low willingness-to-pay for SBPs given that they are concerned with the possible failure of learning. Consequently, the vendor of SBPs faces a dilemma: if the vendor prices too high, it sells only to experts and loses sales to beginners; if the vendor prices too low, this attracts beginners indiscriminately, but forgoes revenue from those beginners who can develop the skill and, hence, are willing to pay more. This study proposes that used-product markets help solve this problem. The vendor can price the new SBPs slightly lower to foster the emergence of a used product market. Beginners then are able to hedge the risk of skill development by either buying a cheaper used SBP on the market or selling their new SBP to partially recoup their expensive outlay. This article shows that the function of such a used-product market increases a vendor's profit in the sale of new SBPs. © 2014 Macmillan Publishers Ltd.