Handbook of Media Economics, vol 1A

4.4.2.2 Repeat Purchase and Money Burning

Tirole (1988, p. 119) gives a simple illustration of how price or advertising can signal the

quality of an experience good that is purchased repeatedly. Assume that the monopolist

considered above faces one consumer with unit demand. The buyer’s willingness to pay is

s independent of how much is spent on advertising. If the consumer buys the product

once, she may choose to purchase it again in a second period after observing s from

her first period experience and observing the second period price charged by the firm.

Since the consumer knows s in the second period, the best the firm can do is to charge a

price of s to extract all the surplus. The firm and the consumer share the same discount

factor δ 2 0,