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Word of mouth model of sales

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  • Campbell, Arthur

Abstract

In this paper, I develop a model of the dynamic pricing of a monopolist while information about its product is diffusing through word of mouth. Individuals who purchase the product engage in word of mouth with their friends. The main result establishes that prices optimally fluctuate over time. A monopolist sets prices over time to balance extracting profits in the short term with increasing information diffusion through word of mouth and thereby the population of potential consumers in the future. The key state variable for determining this tradeoff is the distribution of valuations of the individuals on the edge of the diffusion. This distribution of valuations is determined by the history of prices and changes over time. Our analysis reveals that prices must move up and down infinitely often.

Suggested Citation

  • Campbell, Arthur, 2015. "Word of mouth model of sales," Economics Letters, Elsevier, vol. 133(C), pages 45-50.
    • Handle: RePEc:eee:ecolet:v:133:y:2015:i:c:p:45-50
    DOI: 10.1016/j.econlet.2015.04.019
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    References listed on IDEAS

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    1. John Conlisk & Eitan Gerstner & Joel Sobel, 1984. "Cyclic Pricing by a Durable Goods Monopolist," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(3), pages 489-505.
    2. Joel Sobel, 1984. "The Timing of Sales," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 353-368.
    3. Sobel, Joel, 1991. "Durable Goods Monopoly with Entry of New Consumers," Econometrica, Econometric Society, vol. 59(5), pages 1455-1485, September.
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    Citations

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    Cited by:

    1. Alexei Parahonyak & Nick Vikander, 2024. "Strategic Use of Product Delays to Shape Word-of-Mouth Communication," Economics Series Working Papers 1032, University of Oxford, Department of Economics.
    2. Davide Crapis & Bar Ifrach & Costis Maglaras & Marco Scarsini, 2017. "Monopoly Pricing in the Presence of Social Learning," Management Science, INFORMS, vol. 63(11), pages 3586-3608, November.
    3. Amir Ajorlou & Ali Jadbabaie & Ali Kakhbod, 2018. "Dynamic Pricing in Social Networks: The Word-of-Mouth Effect," Management Science, INFORMS, vol. 64(2), pages 971-979, February.
    4. Yeoh, Eugene & Othman, Khalifah & Ahmad, Halim, 2013. "Understanding medical tourists: Word-of-mouth and viral marketing as potent marketing tools," Tourism Management, Elsevier, vol. 34(C), pages 196-201.
    5. Yanrong Li & Lai Wei & Wei Jiang, 2021. "A Two-stage Pricing Strategy Considering Learning Effects and Word-of-Mouth," Papers 2110.11581, arXiv.org.

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    More about this item

    Keywords

    Sales; Word of mouth; Dynamic pricing;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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