Pricing for newly-launched experience products: Free trial or not?

We investigate a startup firm’s incentives to offer free trial in Monopoly and Duopoly settings, and explore how free trial affects firms’ pricing decisions. We find customers’ prior belief plays a key role and the firm offers free trial only when customers’ prior belief is less than a threshold. Under competition, we show that free trial may induce intense price war. The firm is more likely to offer free trial when the competitor’s product quality is high. We also compare the effects of advertisement and free trial, finding that free trial is preferred when advertising is inefficient.