IDEAS home Printed from https://ideas.repec.org/a/eee/indorg/v37y2014icp170-177.html
   My bibliography  Save this article

Incentives through consumer learning about tastes

Author

Listed:
  • Schumacher, Heiner

Abstract

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.

Suggested Citation

  • Schumacher, Heiner, 2014. "Incentives through consumer learning about tastes," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 170-177.
    • Handle: RePEc:eee:indorg:v:37:y:2014:i:c:p:170-177
    DOI: 10.1016/j.ijindorg.2014.09.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167718714000903
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ijindorg.2014.09.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Mark Armstrong & Yongmin Chen, 2009. "Inattentive Consumers and Product Quality," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 411-422, 04-05.
    2. Steven Tadelis, 1999. "What's in a Name? Reputation as a Tradeable Asset," American Economic Review, American Economic Association, vol. 89(3), pages 548-563, June.
    3. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261, Decembrie.
    4. Alexander E. Saak, 2012. "Dynamic Informative Advertising of New Experience Goods," Journal of Industrial Economics, Wiley Blackwell, vol. 60(1), pages 104-135, March.
    5. Sofia Berto Villas-Boas & J. Miguel Villas-Boas, 2008. "Learning, Forgetting, and Sales," Management Science, INFORMS, vol. 54(11), pages 1951-1960, November.
    6. Roland Benabou & Guy Laroque, 1992. "Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 921-958.
    7. Simon P. Anderson & Régis Renault, 2006. "Advertising Content," American Economic Review, American Economic Association, vol. 96(1), pages 93-113, March.
    8. Dirk Bergemann & Juuso Valimaki, 1997. "Market Diffusion with Two-Sided Learning," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 773-795, Winter.
    9. Steven A. Matthews & Nicola Persico, 2007. "Information Acquisition and Refunds for Returns," Carlo Alberto Notebooks 54, Collegio Carlo Alberto.
    10. George J. Mailath & Larry Samuelson, 2001. "Who Wants a Good Reputation?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(2), pages 415-441.
    11. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    12. Inderst, Roman & Peitz, Martin, 2012. "Informing consumers about their own preferences," International Journal of Industrial Organization, Elsevier, vol. 30(5), pages 417-428.
    13. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    14. Roman Inderst & Marco Ottaviani, 2012. "Financial Advice," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 494-512, June.
    15. Qingmin Liu, 2011. "Information Acquisition and Reputation Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(4), pages 1400-1425.
    16. Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Consumer Protection and the Incentive to Become Informed," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 399-410, 04-05.
    17. Bar-Isaac, Heski & Tadelis, Steven, 2008. "Seller Reputation," Foundations and Trends(R) in Microeconomics, now publishers, vol. 4(4), pages 273-351, August.
    18. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
    19. Dirk Bergemann & Juuso Välimäki, 2006. "Dynamic Pricing of New Experience Goods," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 713-743, August.
    20. Pascal Courty & Li Hao, 2000. "Sequential Screening," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(4), pages 697-717.
    21. Johannes Hörner, 2002. "Reputation and Competition," American Economic Review, American Economic Association, vol. 92(3), pages 644-663, June.
    22. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-450, June.
    23. Monte, Daniel, 2013. "Bounded memory and permanent reputations," Journal of Mathematical Economics, Elsevier, vol. 49(5), pages 345-354.
    24. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
    25. Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, number 9780195300796, Decembrie.
    26. Emir Kamenica & Sendhil Mullainathan & Richard Thaler, 2011. "Helping Consumers Know Themselves," American Economic Review, American Economic Association, vol. 101(3), pages 417-422, May.
    27. Steven Tadelis, 2002. "The Market for Reputations as an Incentive Mechanism," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 854-882, August.
    28. Bagwell, Kyle, 2007. "The Economic Analysis of Advertising," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 28, pages 1701-1844, Elsevier.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, November.
    2. Bernardita Vial & Felipe Zurita, 2013. "Reputation-Driven Industry Dynamics," Documentos de Trabajo 436, Instituto de Economia. Pontificia Universidad Católica de Chile..
    3. Jie Bai, 2016. "Melons as Lemons: Asymmetric Information, Consumer Learning and Seller Reputation," Natural Field Experiments 00540, The Field Experiments Website.
    4. Heski Bar-Isaac & Joyee Deb, 2012. "Reputation for a Servant of Two Masters," Working Papers 12-08, New York University, Leonard N. Stern School of Business, Department of Economics.
    5. Mark Armstrong, 2015. "Search and Ripoff Externalities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 273-302, November.
    6. Hattori, Keisuke & Higashida, Keisaku, 2014. "Misleading advertising and minimum quality standards," Information Economics and Policy, Elsevier, vol. 28(C), pages 1-14.
    7. Alcalde, Pilar & Vial, Bernardita, 2016. "Willingness to Pay for Firm Reputation: Paying for Risk Rating in the Annuity Market," MPRA Paper 68993, University Library of Munich, Germany.
    8. Chrysanthos Dellarocas, 2003. "The Digitization of Word of Mouth: Promise and Challenges of Online Feedback Mechanisms," Management Science, INFORMS, vol. 49(10), pages 1407-1424, October.
    9. Salvatore Piccolo & Piero Tedeschi & Giovanni Ursino, 2018. "Deceptive Advertising with Rational Buyers," Management Science, INFORMS, vol. 64(3), pages 1291-1310, March.
    10. Michael Grubb, 2015. "Failing to Choose the Best Price: Theory, Evidence, and Policy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 303-340, November.
    11. Jeanine Miklós-Thal, 2012. "Linking reputations through umbrella branding," Quantitative Marketing and Economics (QME), Springer, vol. 10(3), pages 335-374, September.
    12. Becker, Bo & Milbourn, Todd, 2011. "How did increased competition affect credit ratings?," Journal of Financial Economics, Elsevier, vol. 101(3), pages 493-514, September.
    13. Jolivet, Grégory & Jullien, Bruno & Postel-Vinay, Fabien, 2016. "Reputation and prices on the e-market: Evidence from a major French platform," International Journal of Industrial Organization, Elsevier, vol. 45(C), pages 59-75.
    14. Anderson, Simon P. & Gabszewicz, Jean J., 2006. "The Media and Advertising: A Tale of Two-Sided Markets," Handbook of the Economics of Art and Culture, in: V.A. Ginsburgh & D. Throsby (ed.), Handbook of the Economics of Art and Culture, edition 1, volume 1, chapter 18, pages 567-614, Elsevier.
    15. Daniel Monte & Ideen Riahi & Nikolaus Robalino, 2019. "Collusion and turnover in experience goods markets," Review of Economic Design, Springer;Society for Economic Design, vol. 23(3), pages 91-111, December.
    16. Baker Matthew J. & George Lisa M, 2010. "The Role of Television in Household Debt: Evidence from the 1950's," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-38, May.
    17. Hongbin Cai & Ichiro Obara, 2009. "Firm reputation and horizontal integration," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 340-363, June.
    18. Simon P. Anderson & Régis Renault, 2013. "The Advertising Mix for a Search Good," Management Science, INFORMS, vol. 59(1), pages 69-83, April.
    19. Soberman, David A. & Xiang, Yi, 2022. "Designing the content of advertising in a differentiated market," International Journal of Research in Marketing, Elsevier, vol. 39(1), pages 190-211.
    20. Luís Almeida Costa & Luís Vasconcelos, 2010. "Share the Fame or Share the Blame? The Reputational Implications of Partnerships," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(2), pages 259-301, June.

    More about this item

    Keywords

    Moral hazard; Learning; Advertising;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:indorg:v:37:y:2014:i:c:p:170-177. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505551 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.