Menu Pricing and Learning

Abstract

We analyze the design of dynamic menus to sell experience goods. The quality of the product is initially unknown, and the total quantity sold in each period determines the amount of information in the market. We characterize the optimum menu as a function of consumers' beliefs, and the dynamic adjustments resulting from the diffusion of information. The firm faces a dynamic trade-off between gains from trade, information production, and information rents. It initially charges lower prices, sacrificing short-term revenue to increase sales. As more information is revealed, prices increase, and low-valuation buyers are excluded, even when the product's quality is high.