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Monopoly Pricing with Social Learning

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  • Marco Ottaviani

Abstract

This paper analyzes optimal dynamic pricing by a monopolist in a market where buyers learn about the quality of the good by observing each other. In the initial phase the monopolist prefers prices that allow more transmission of information from current to future buyers. Eventually the monopolist will stop the learning process, either by exiting or by capturing the entire market. Once an expensive good becomes popular, it is optimal for the monopolist to reduce the price and to sell to all consumers. The expected long-run inefficiency is shown to be generally lower than in the model with fixed prices. Efficiency can be enhanced by pricing below marginal cost.

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Bibliographic Info

Paper provided by ESRC Centre on Economics Learning and Social Evolution in its series ELSE working papers with number 035.

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Handle: RePEc:els:esrcls:035

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  1. Welch, Ivo, 1992. " Sequential Sales, Learning, and Cascades," Journal of Finance, American Finance Association, vol. 47(2), pages 695-732, June.
  2. Wolfgang Pesendorfer, 1993. "Design Innovation and Fashion Cycles," Discussion Papers 1049, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Dirk Bergemann & Juuso Valimaki, 1996. "Market Experimentation and Pricing," Cowles Foundation Discussion Papers 1122, Cowles Foundation for Research in Economics, Yale University.
  4. Ernst R. Berndt & Linda T. Bui & David H. Lucking-Reiley & Glen L. Urban, 1996. "The Roles of Marketing, Product Quality, and Price Competition in the Growth and Composition of the U.S. Antiulcer Drug Industry," NBER Chapters, in: The Economics of New Goods, pages 277-328 National Bureau of Economic Research, Inc.
  5. Cooper, Russell & Ross, Thomas W, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 197-207, April.
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Cited by:
  1. Heski Bar-Isaac, 2001. "Self-confidence and survival," LSE Research Online Documents on Economics 19329, London School of Economics and Political Science, LSE Library.
  2. Bose, Subir & Orosel, Gerhard O & Ottaviani, Marco & Vesterlund, Lise, 2005. "Dynamic Monopoly Pricing and Herding," CEPR Discussion Papers 5003, C.E.P.R. Discussion Papers.
  3. Subir Bose & Gerhard Orosel & Marco Ottaviani & Lise Vesterlund, 2008. "Monopoly pricing in the binary herding model," Economic Theory, Springer, vol. 37(2), pages 203-241, November.

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