Donald Lehmann

Sampling Information Goods: How Much Should Be Free?

Coauthor(s): Florian Stahl, Oded Koenigsberg, Daniel Halbheer.

Abstract:
This paper examines optimal sampling and pricing of information goods for firms that generate revenues from both sales and advertising. We develop a model where the demand for paid information goods is influenced by the sample portion that the firm offers for free. Taking into account the consumers’ initial valuation and experienced quality of the free version, we characterize the firm’s optimal sampling and pricing decisions. We find that the effect of advertising revenues on optimal sample portion and price depends on expected and experienced quality. Moreover, a firm should never offer a free sample when the expected quality exceeds the experienced quality. Our model assumptions and results are generally consistent with an empirical analysis of firm data on the market for news. We compare the models’ implications with managerial decisions and show that managers have a tendency to offer too small samples when consumers use them extensively in updating their expectations about product quality.

Source: Working Paper
Exact Citation:
Stahl, Florian, Oded Koenigsberg, Daniel Halbheer, and Donald Lehmann. "Sampling Information Goods: How Much Should Be Free?" Working Paper, Columbia Business School, 2010.
Date: 2010