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Strategic firms and endogenous consumer emulation

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  • Philipp Kircher
  • Andrew Postlewaite

Abstract

Better-informed consumers may be treated preferentially by firms because their consumption serves as a quality signal for other customers. For normal goods this results in wealthy individuals being treated better than poor individuals. We investigate this phenomenon in an equilibrium model of social learning with heterogeneous consumers and firms that act strategically. Consumers search for high-quality firms and condition their choices on observed actions of other consumers. When they observe consumers who are more likely to have identified a high-quality firm, uninformed individuals will optimally emulate those consumers. One group of consumers arise endogenously as “leaders” whose consumption behavior is emulated. Follow-on sales induce firms to give preferential treatment to these lead consumers, which reinforces their learning.

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File URL: http://eprints.lse.ac.uk/29699/
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 29699.

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Date of creation: 2008
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Publication status: Published in Quarterly Journal of Economics, 2008, 123(2), pp. 621. ISSN: 0033-5533
Handle: RePEc:ehl:lserod:29699

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Cited by:
  1. Stone, Daniel F. & Miller, Steven J., 2013. "Leading, learning and herding," Mathematical Social Sciences, Elsevier, vol. 65(3), pages 222-231.
  2. Amador, Manuel & Weill, Pierre-Olivier, 2012. "Learning from private and public observations of othersʼ actions," Journal of Economic Theory, Elsevier, vol. 147(3), pages 910-940.

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