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Monopoly Pricing with Social Learning

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Author Info
Marco Ottaviani

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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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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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Web page: http://www.ucl.ac.uk/economics/ELSE/
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Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

References listed on IDEAS
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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. [Downloadable!] (restricted)
  2. Cooper, Russell & Ross, Thomas W, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Blackwell Publishing, vol. 51(2), pages 197-207, April. [Downloadable!] (restricted)
  3. Dirk Bergemann & Juuso Valimaki, 1996. "Market Experimentation and Pricing," Cowles Foundation Discussion Papers 1122, Cowles Foundation, Yale University. [Downloadable!]
  4. Wolfgang Pesendorfer, 1993. "Design Innovation and Fashion Cycles," Discussion Papers 1049, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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(explanations, 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.)

  1. 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. [Downloadable!] (restricted)
  2. Heski Bar-Isaac, 2001. "Self-Confidence and Survival," STICERD - Theoretical Economics Paper Series 428, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
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This page was last updated on 2008-9-25.

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