30 Seconds or Free ! Contingent Contracts in Electronic Commerce

We analyze contingent price contracts as a mechanism for mitigating the effects of increased quality uncertainty in e-commerce. A contingent contract specifies a sequence of possible quality levels and corresponding prices. Electronic commerce infrastructure enables the capture and dissemination of information about the likelihood of each quality level. When the public probabilities differ from the firm’s private (and true) probabilities, contingent contracts can expand market size and the chance of market existence. When the market underestimates the firm’s ability to deliver quality, contingent contracts are strictly optimal, and increase both the firm’s expected margin and the fraction of buyers. Interestingly, the firm should offer a full-price rebate in this case. Conversely, when the market overestimates the firm’s ability to deliver quality, a single-price contract is strictly optimal. Our results have actionable value in such diverse e-commerce contexts as electronic retailing, application service providers, electronic fitting rooms, telecommunications services, business exchanges, and online travel booking.