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Dynamic monopoly pricing and herding

Author

Listed:
  • Subir Bose
  • Gerhard Orosel
  • Marco Ottaviani
  • Lise Vesterlund

Abstract

This paper studies dynamic pricing by a monopolist selling to buyers who learn from each other’s purchases. The price posted in each period serves to extract rent from the current buyer, as well as to control the amount of information transmitted to future buyers. As information increases future rent extraction, the monopolist has an incentive to subsidize learning by charging a price that results in information revelation. Nonetheless in the long run, the monopolist generally induces herding by either selling to all buyers or exiting the market.
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Suggested Citation

  • Subir Bose & Gerhard Orosel & Marco Ottaviani & Lise Vesterlund, 2006. "Dynamic monopoly pricing and herding," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 910-928, December.
  • Handle: RePEc:bla:randje:v:37:y:2006:i:4:p:910-928 DOI: j.1756-2171.2006.tb00063.x
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    References listed on IDEAS

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    Cited by:

    1. Ludmila Matyskova & Jan Sipek, 2017. "Manipulation of Cursed Beliefs in Online Reviews," CERGE-EI Working Papers wp586, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    2. Philipp Kircher & Andrew Postlewaite, 2008. "Strategic Firms and Endogenous Consumer Emulation," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 621-661.
    3. Liu, Ting & Schiraldi, Pasquale, 2007. "Social learning and monopolist's product launching strategy," LSE Research Online Documents on Economics 4921, London School of Economics and Political Science, LSE Library.
    4. Armstrong, Mark & Chen, Yongmin, 2012. "Discount pricing," MPRA Paper 39074, University Library of Munich, Germany.
    5. Nicolás Figueroa & Carla Guadalupi, 2017. "Convincing early adopters: Price signals and Information transmission," Documentos de Trabajo 486, Instituto de Economia. Pontificia Universidad Católica de Chile..
    6. Zegners, Dainis, 2017. "Building an Online Reputation with Free Content: Evidence from the E-book Market," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168293, Verein für Socialpolitik / German Economic Association.
    7. Li, Tian & Zhang, Hongtao, 2015. "Information sharing in a supply chain with a make-to-stock manufacturer," Omega, Elsevier, vol. 50(C), pages 115-125.
    8. Weng, Xi, 2015. "Dynamic pricing in the presence of individual learning," Journal of Economic Theory, Elsevier, vol. 155(C), pages 262-299.
    9. Gill, David & Sgroi, Daniel, 2012. "The optimal choice of pre-launch reviewer," Journal of Economic Theory, Elsevier, pages 1247-1260.
    10. Alexei Parakhonyak & Nick Vikander, 2016. "Inducing Herding with Capacity Constraints," Economics Series Working Papers 808, University of Oxford, Department of Economics.
    11. Masaki Aoyagi & Manaswini Bhalla & Hikmet Gunay, 2014. "Social Learning and Delay in a Dynamic Model of Price Competition," ISER Discussion Paper 0909, Institute of Social and Economic Research, Osaka University.
    12. William A. Branch & George W. Evans, 2011. "Learning about Risk and Return: A Simple Model of Bubbles and Crashes," American Economic Journal: Macroeconomics, American Economic Association, pages 159-191.
    13. Subir Bose & Gerhard Orosel & Marco Ottaviani & Lise Vesterlund, 2008. "Monopoly pricing in the binary herding model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 203-241.
    14. Gill, David & Sgroi, Daniel, 2008. "The Optimal Choice of Pre-launch Reviewer : How Best to Transmit Information using Tests and Conditional Pricing," The Warwick Economics Research Paper Series (TWERPS) 877, University of Warwick, Department of Economics.
    15. Alexei Parakhonyak & Nick Vikander, 2013. "Optimal Sales Schemes for Network Goods," Discussion Papers 13-11, University of Copenhagen. Department of Economics.
    16. Ting Liu & Pasquale Schiraldi, 2012. "New product launch: herd seeking or herd preventing?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 627-648.
    17. Aoyagi, Masaki & Bhalla, Manaswini & Gunay, Hikmet, 2016. "Social learning and delay in a dynamic model of price competition," Journal of Economic Theory, Elsevier, vol. 165(C), pages 565-600.
    18. Aoyagi, Masaki, 2007. "Efficient collusion in repeated auctions with communication," Journal of Economic Theory, Elsevier, pages 61-92.
    19. Bar Ifrach & Costis Maglaras & Marco Scarsini, 2011. "Monopoly Pricing in the Presence of Social Learning," Working Papers 11-11, NET Institute, revised Nov 2011.
    20. Christopher J. Ellis & John Fender, 2008. "Democratic Errors," University of Oregon Economics Department Working Papers 2008-2, University of Oregon Economics Department.
    21. Nicollier, Luciana A, 2013. "Reviews, Prices and Endogenous Information Transmission," The Warwick Economics Research Paper Series (TWERPS) 1029, University of Warwick, Department of Economics.
    22. Masaki Aoyagi, 2010. "Optimal Sales Schemes against Interdependent Buyers," American Economic Journal: Microeconomics, American Economic Association, pages 150-182.
    23. Manuel Mueller-Frank & Mallesh M. Pai, 2016. "Social Learning with Costly Search," American Economic Journal: Microeconomics, American Economic Association, pages 83-109.
    24. Sandro Shelegia & Daniel Garcia, 2015. "Consumer Search with Observational Learning," Vienna Economics Papers 1502, University of Vienna, Department of Economics.

    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • 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

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