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Dynamic Monopoly Pricing and Herding

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  • Bose, Subir
  • Orosel, Gerhard O
  • Ottaviani, Marco
  • Vesterlund, Lise

Abstract

This paper studies dynamic pricing by a monopolist selling to buyers who learn from each other’s purchases. The price posted in each period serves to extract rent from the current buyer, as well as to control the amount of information transmitted to future buyers. As information increases future rent extraction, the monopolist has an incentive to subsidize learning by charging a price that results in information revelation. Nonetheless in the long run, the monopolist generally induces herding by either selling to all buyers or exiting the market.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5003.

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Date of creation: Apr 2005
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Handle: RePEc:cpr:ceprdp:5003

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Related research

Keywords: herd behaviour; informational cascade; monopoly; public information; social learning;

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References

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  1. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  2. Moscarini, Giuseppe & Ottaviani, Marco, 2001. "Price Competition for an Informed Buyer," Journal of Economic Theory, Elsevier, vol. 101(2), pages 457-493, December.
  3. Heski Bar-Isaac, 2003. "Reputation and Survival: Learning in a Dynamic Signalling Model," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 231-251.
  4. Giuseppe Moscarin & Marco Ottaviani & Lones Smith, . "Social Learning in a Changing World," ELSE working papers 010, ESRC Centre on Economics Learning and Social Evolution.
  5. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
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  7. Marco Ottaviani, . "Monopoly Pricing with Social Learning," ELSE working papers 035, ESRC Centre on Economics Learning and Social Evolution.
  8. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-48, September.
  9. Subir Bose & Gerhard O. Orosel & Lise Vesterlund, 2002. "Optimal Pricing and Endogenous Herding," CESifo Working Paper Series 727, CESifo Group Munich.
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  12. Dirk Bergemann & Juuso Valimaki, 1996. "Learning and Strategic Pricing," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1113, Cowles Foundation for Research in Economics, Yale University.
  13. Lones Smith & Peter Sorensen, 2000. "Pathological Outcomes of Observational Learning," Econometrica, Econometric Society, Econometric Society, vol. 68(2), pages 371-398, March.
  14. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 797-817, August.
  15. Becker, Gary S, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(5), pages 1109-16, October.
  16. David P. Myatt & Justin P. Johnson, 2004. "On the Simple Economics of Advertising, Marketing, and Product Design," Economics Series Working Papers 185, University of Oxford, Department of Economics.
  17. Taylor, Curtis R, 1999. "Time-on-the-Market as a Sign of Quality," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(3), pages 555-78, July.
  18. Aghion, Philippe, et al, 1991. "Optimal Learning by Experimentation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(4), pages 621-54, July.
  19. Ramon Caminal & Xavier Vives, 1996. "Why Market Shares Matter: An Information-Based Theory," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 221-239, Summer.
  20. Lewis, Tracy R & Sappington, David E M, 1994. "Supplying Information to Facilitate Price Discrimination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 309-27, May.
  21. Neeman, Zvika & Orosel, Gerhard O., 1999. "Herding and the Winner's Curse in Markets with Sequential Bids," Journal of Economic Theory, Elsevier, vol. 85(1), pages 91-121, March.
  22. Welch, Ivo, 1992. " Sequential Sales, Learning, and Cascades," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 695-732, June.
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Citations

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Cited by:
  1. Alexei Parakhonyak & Nick Vikander, 2013. "Optimal Sales Schemes for Network Goods," Discussion Papers 13-11, University of Copenhagen. Department of Economics.
  2. Bar Ifrach & Costis Maglaras & Marco Scarsini, 2011. "Monopoly Pricing in the Presence of Social Learning," Working Papers 11-11, NET Institute, revised Nov 2011.
  3. Masaki Aoyagi, 2005. "Optimal Sales Schemes against Interdependent Buyers," ISER Discussion Paper 0645, Institute of Social and Economic Research, Osaka University.
  4. Christopher J. Ellis & John Fender, 2010. "Democratic Errors," Discussion Papers, Department of Economics, University of Birmingham 10-03, Department of Economics, University of Birmingham.
  5. Nicollier, Luciana A, 2013. "Reviews, Prices and Endogenous Information Transmission," The Warwick Economics Research Paper Series (TWERPS) 1029, University of Warwick, Department of Economics.
  6. Ting Liu & Pasquale Schiraldi, 2007. "Social learning and monopolist's product launching strategy," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 4921, London School of Economics and Political Science, LSE Library.
  7. Ting Liu & Pasquale Schiraldi, 2012. "New product launch: herd seeking or herd preventing?," Economic Theory, Springer, Springer, vol. 51(3), pages 627-648, November.
  8. Philipp Kircher & Andrew Postlewaite, 2008. "Strategic Firms and Endogenous Consumer Emulation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(2), pages 621-661, 05.
  9. Subir Bose & Gerhard Orosel & Marco Ottaviani & Lise Vesterlund, 2008. "Monopoly pricing in the binary herding model," Economic Theory, Springer, Springer, vol. 37(2), pages 203-241, November.
  10. Gill, David & Sgroi, Daniel, 2008. "The Optimal Choice of Pre-launch Reviewer : How Best to Transmit Information using Tests and Conditional Pricing," The Warwick Economics Research Paper Series (TWERPS) 877, University of Warwick, Department of Economics.

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