Incentives through consumer learning about tastes

- Consumer learning about own preferences generates incentives for high quality.
- A firm can signal commitment to high quality by serving inexperienced consumers.
- This incentive mechanism is a new type of repeat-purchase mechanism.
- It has implications for optimal advertising, advertising content and consumer education.

We consider a long-lived firm that faces an infinite sequence of finitely-lived consumers. In each period, the firm can exert either high or low effort, which is the firm's private information. When consumers learn about the firm's talent from the outcomes of previous transactions, there exists no equilibrium in which the firm always exerts high effort. However, when consumers learn about their own tastes, such an equilibrium can exist. Consumer learning about tastes therefore is an alternative to reputational concerns that produces stable incentives. We discuss the implications of this mechanism for advertising, advertising content, and consumer education.