We consider a monopolist who sells identical objects of common but unknown value in a herding-prone environment. Buyers make their purchasing decisions sequentially, and rely on a private signal as well as We consider a monopolist who sells identical objects of common but previous buyers' actions to infer the common value of the object. The model applies to a variety of cases, such as the introduction of a new product or the sale of licenses to use a patent. We characterize the monopolist's optimal pricing strategy and its implications for the temporal pattern of prices and for herding. The analysis is performed under alternative assumptions about observability of prices. We find that when previous prices are observable, herding may but need not arise. In contrast, herding arises immediately when previous prices are unobservable and the seller's equilibrium strategy is a pure Markov strategy. While the possibility of social learning is present in the first case, it is absent in the second. Finally, we examine the seller's incentive to manipulate the buyers' evaluation of the object when buyers are naive. Using secret discounts the seller successfully interferes with social learning, and herding occurs in finite time.
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number
CESifo Working Paper No. 727.
Find related papers by JEL classification: D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Dirk Bergemann & Juuso Valimaki, 1996.
"Experimentation in Markets,"
Discussion Papers
1220, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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