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Try before you buy: A theory of dynamic information acquisition

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  • Lang, Ruitian

Abstract

This paper develops a model of dynamic information acquisition where a buyer acquires information about a product, and a monopoly seller sets the price of her product anticipating the buyer's behavior. It finds that the buyer makes a purchase decision when his expected gain from trade hits one of two boundaries which are deterministic functions of time. Those boundaries are independent of the buyer's prior value. The seller's profit is increasing in the buyer's cost of information if and only if the buyer's prior purchase probability is above fifty percent. In analyzing the problem, a close connection between the information acquisition problem and the theory of American options is established and exploited.

Suggested Citation

  • Lang, Ruitian, 2019. "Try before you buy: A theory of dynamic information acquisition," Journal of Economic Theory, Elsevier, vol. 183(C), pages 1057-1093.
  • Handle: RePEc:eee:jetheo:v:183:y:2019:i:c:p:1057-1093
    DOI: 10.1016/j.jet.2019.07.014
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    References listed on IDEAS

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    More about this item

    Keywords

    Sequential sampling; Diffusion process; Continuous time; Monopoly pricing;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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