Traditional or Electronic Sampling? Benefits of Higher Sampling Costs

Firms offer free samples to disclose product quality to consumers. Traditionally, firms have used sales representatives to distribute samples; today, new technologies enable firms to distribute samples electronically, substantially reducing cost. We find that when a firm switches from traditional (t-sampling) to electronic (e-sampling) format, not only does its own profit increase, but its competitor's profit does as well. However, even if e-sampling only differs from t-sampling by reducing cost, not all firms should adopt it. When the cost difference is not large enough, symmetric firms should choose asymmetric disclosure formats to soften price competition. Moreover, the high-cost firm can make a higher profit than the low-cost firm. In addition, although both firms distribute samples for fewer products as their own sampling cost increases, the t-sampling firm increases but the e-sampling firm decreases sampling activities as their competitor's sampling cost increases. Furthermore, a firm's ex ante profit decreases with its competitor's cost and can increase with its own cost. The availability of e-sampling technologies benefits firms and improves social welfare at the expense of reducing consumer surplus.