Strategic Firms and Endogenous Consumer Emulation
AbstractBetter informed consumers may be treated preferentially by firms since 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 arises 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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Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 08-003.
Length: 28 pages
Date of creation: 02 Jan 2008
Date of revision:
Search; social learning; consumption signalling;
Other versions of this item:
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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