We use the Hendricks and Kovenock (1989) framework to study the consumer problem under an informational externality. The informational externality arises when each consumer of a social network is endowed with private information regarding the quality of a good. In such situations, the past purchasing decisions of the consumers are informative and, thus, are used as partially revealing signals of private information. Asymmetric information and the observability of actions render the consumer problem dynamic and strategic because the purchasing decision of a consumer affects the other consumers' future payoffs through the learning process. We show that there exists a unique symmetric Bayesian Nash equilibrium. The informational externality increases the likelihood for a consumer to refrain from purchasing the good immediately in order to make a more informed decision in the future.
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Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number
09-04.
Length: 19 pages Date of creation: Apr 2009 Date of revision: Handle: RePEc:iea:carech:0904
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