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Social learning and delay in a dynamic model of price competition

Listed author(s):
  • Aoyagi, Masaki
  • Bhalla, Manaswini
  • Gunay, Hikmet

This paper studies dynamic price competition between two firms selling differentiated durable goods to two buyers whose valuations of the two goods depend on their own private type as well as that of the other buyer. We derive a key intertemporal property of the equilibrium prices and construct an equilibrium based on this property. We show that social learning reduces the equilibrium prices in the sense that when the buyers are more interdependent and hence have a stronger incentive to wait and see, the firms respond by lowering their period 1 prices. Interestingly, we find that this response by the firms along with the intertemporal property of the equilibrium prices implies that buyers delay their decisions less often when they become more interdependent.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022053116300424
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 165 (2016)
Issue (Month): C ()
Pages: 565-600

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Handle: RePEc:eee:jetheo:v:165:y:2016:i:c:p:565-600
DOI: 10.1016/j.jet.2016.05.005
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  7. Chamley, Christophe & Gale, Douglas, 1994. "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, Econometric Society, vol. 62(5), pages 1065-1085, September.
  8. Hikmet Gunay, 2008. "Information Aggregation Under Strategic Delay," Economics Bulletin, AccessEcon, vol. 12(23), pages 1-8.
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  17. repec:rje:randje:v:37:y:2006:i:4:p:910-928 is not listed on IDEAS
  18. Sgroi, Daniel, 2002. "Optimizing Information in the Herd: Guinea Pigs, Profits, and Welfare," Games and Economic Behavior, Elsevier, vol. 39(1), pages 137-166, April.
  19. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  20. Ramon Caminal & Xavier Vives, 1996. "Why Market Shares Matter: An Information-Based Theory," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 221-239, Summer.
  21. Bian, Qin & Forsythe, Sandra, 2012. "Purchase intention for luxury brands: A cross cultural comparison," Journal of Business Research, Elsevier, vol. 65(10), pages 1443-1451.
  22. Yuri Levin & Jeff McGill & Mikhail Nediak, 2009. "Dynamic Pricing in the Presence of Strategic Consumers and Oligopolistic Competition," Management Science, INFORMS, vol. 55(1), pages 32-46, January.
  23. Mak, Vincent & Rapoport, Amnon & Gisches, Eyran J., 2012. "Competitive dynamic pricing with alternating offers: Theory and experiment," Games and Economic Behavior, Elsevier, vol. 75(1), pages 250-264.
  24. David Besanko & Wayne L. Winston, 1990. "Optimal Price Skimming by a Monopolist Facing Rational Consumers," Management Science, INFORMS, vol. 36(5), pages 555-567, May.
  25. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
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