Lowering Customer Evaluation Costs, Product Differentiation, and Price Competition

When match uncertainty is resolved via costly evaluation, the first product sampled by a customer is more likely to make the sale. This prompts firms to lower their products’ evaluation costs to attract customers to sample their products first. Such efforts by firms are called customer learning investment (CLI). When product quality is freely observable but horizontal match is not, we examine how CLI choices interact with quality and price competition in a duopoly. CLI has a competition effect in that a higher CLI of a firm increases its demand but decreases that of its rivals. In the market-covered duopoly, both qualities will decrease (increase) when the high-end (low-end) firm invests more in customer learning, and remain unchanged when they invest equally, relative to when neither firm invests. We further show that the firm with a higher relative production efficiency invests more in customer learning than the competitor. In the market-not-covered duopoly, CLI by the low-end firm also creates a market-expansion effect by inducing some additional low-end customers to sample and purchase its product. This may induce it to invest more than the high-end firm, even when the latter has a higher relative production efficiency.