Introduction to Part V: Product quality and information

So far in this book, we have mainly been dealing with search goods, i.e., products or services with features and characteristics that can be easily evaluated before purchase. In contrast, this part of the book examines products and services with characteristics that can only be ascertained upon consumption because they are difficult to observe in advance. We talk here of experience goods.

Managing experience goods is the day-to-day concern of large firms selling consumer goods, such as Nestlé, Procter&Gamble, or Unilever. These firms frequently introduce new branded products. They are always interested in not only making consumers aware of the product (e.g., through advertising as we have analysed in Chapter 6) but also in convincing consumers that the new product satisfies their wants. Perhaps the main challenge when launching a new product is that consumers do not observe the quality of the product, as is typically the case with experience goods. Similarly, firms that enter an otherwise perfectly competitive industry with a patented product (or, alternatively open new markets with a proprietary technology) often produce an experience good.

These markets are characterized by asymmetric information as consumers have less information than the producers about product quality. In such markets, firms have to convince consumers that their products are of high quality.