Pricing information goods: free vs. pay content

We analyze the incentives of a provider of information goods to offer a proportion of his product for free, when consumers are uncertain about the quality of the good. The provider faces the following trade-off. On the one hand, the free version of the product acts as a partially informative signal; the higher the proportion of the product which is offered for free, that is, the higher the size of the free version, the higher the probability that a consumer will discover the true quality of the good. On the other hand, the higher the size of the free version, the lower the willingness to pay for the remaining parts of the product. In a separating equilibrium, a low quality seller offers no free version and sets the perfect information optimal price, whereas a high quality seller offers a free version of his product to signal his quality. In a pooling equilibrium, both low and high quality sellers propose free versions of their products.

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