Dynamic pricing under social learning and strategic consumers

Description

A monopolist uses pricing as a strategic instrument to influence consumers’ beliefs about the unknown quality of its product. Consumers observe past prices and sales to update their beliefs and, in each period, decide whether to purchase the product or wait for a potentially lower price in the future. We solve for the monopolist’s optimal pricing strategy and show that, for certain ranges of consumer beliefs, prices increase over time. Correspondingly, per-period profits also rise over time. Our analysis further demonstrates that the firm has an incentive to encourage social learning over a wider range of consumer beliefs when consumers can delay their purchase decisions. As a result, expected revenues are higher when consumers retain the option to postpone consumption, compared to situations in which they are unable to do so.

Publication Date

1-1-2011

Keywords

Strategic consumer, Social learning, Pricing durable goods

Conference

9th Annual International Industrial Organization Conference, 8-10 April, 2011, Boston, MA, USA

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