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Try before you buy: A theory of dynamic information acquisition

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  • Lang, Ruitian

Abstract

This paper develops a model of dynamic information acquisition where a buyer acquires information about a product, and a monopoly seller sets the price of her product anticipating the buyer's behavior. It finds that the buyer makes a purchase decision when his expected gain from trade hits one of two boundaries which are deterministic functions of time. Those boundaries are independent of the buyer's prior value. The seller's profit is increasing in the buyer's cost of information if and only if the buyer's prior purchase probability is above fifty percent. In analyzing the problem, a close connection between the information acquisition problem and the theory of American options is established and exploited.

Suggested Citation

  • Lang, Ruitian, 2019. "Try before you buy: A theory of dynamic information acquisition," Journal of Economic Theory, Elsevier, vol. 183(C), pages 1057-1093.
    • Handle: RePEc:eee:jetheo:v:183:y:2019:i:c:p:1057-1093
    DOI: 10.1016/j.jet.2019.07.014
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    Cited by:

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    2. Vasudha Jain & Mark Whitmeyer, 2021. "Search and Competition with Flexible Investigations," Papers 2104.13159, arXiv.org.
    3. Brian C. Albrecht & Mark Whitmeyer, 2023. "Comparison Shopping: Learning Before Buying From Duopolists," Papers 2302.06580, arXiv.org, revised Apr 2023.
    4. Monire Jalili & Michael S. Pangburn, 2020. "Pricing Joint Sales and Rentals: When are Purchase Conversion Discounts Optimal?," Production and Operations Management, Production and Operations Management Society, vol. 29(12), pages 2679-2695, December.

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    More about this item

    Keywords

    Sequential sampling; Diffusion process; Continuous time; Monopoly pricing;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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