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On the Informational Role of Quantities: Durable Goods and Consumers' Word-of-Mouth Communication

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  • Vettas, Nikolaos

Abstract

A dynamic incomplete information game is set up to study the introduction of a durable good when consumers can learn its quality from previous buyers. High sales today imply fewer potential buyers tomorrow, but each buyer will have better information about the good. Consumers are fully rational and can update their beliefs, even when they do not directly receive information; in equilibrium, no news is bad news. A low-quality firm follows a 'fly-by-night' strategy, randomizing over the timing of sales. A high-quality firm spreads out its sales more smoothly, solving a stochastic dynamic programming problem. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Vettas, Nikolaos, 1997. "On the Informational Role of Quantities: Durable Goods and Consumers' Word-of-Mouth Communication," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 915-944, November.
  • Handle: RePEc:ier:iecrev:v:38:y:1997:i:4:p:915-44
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    Cited by:

    1. 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..
    2. Alcalá, Francisco & González-Maestre, Miguel & Martínez-Pardina, Irene, 2014. "Information and quality with an increasing number of brands," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 109-117.
    3. Maarten C. W. Janssen & Vladimir A. Karamychev, 2002. "Cycles and multiple equilibria in the market for durable lemons," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(3), pages 579-601.
    4. Kováč, Eugen & Schmidt, Robert C., 2014. "Market share dynamics in a duopoly model with word-of-mouth communication," Games and Economic Behavior, Elsevier, vol. 83(C), pages 178-206.
    5. Navarro, Noemí, 2012. "Price and quality decisions under network effects," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 263-270.
    6. Noemí Navarro, 2008. "Quality provision under referral consumption," Working Papers 2008-12, Universidad de Málaga, Department of Economic Theory, Málaga Economic Theory Research Center.
    7. Moraga González, José Luis, 1997. "Quality uncetainty and informative advertising," UC3M Working papers. Economics 6040, Universidad Carlos III de Madrid. Departamento de Economía.
    8. Hsiaw, Alice, 2014. "Learning tastes through social interaction," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PA), pages 64-85.
    9. Kosfeld, M., 1999. "Individual decision making and social interaction," Other publications TiSEM 69e75ff4-8036-4cf5-a270-1, Tilburg University, School of Economics and Management.
    10. Marco Ottaviani, "undated". "Monopoly Pricing with Social Learning," ELSE working papers 035, ESRC Centre on Economics Learning and Social Evolution.
    11. Pier-Andre Bouchard St-Amant, 2013. "Externalities, Social Value and Word of Mouth: Notions of Public Economics on Networks," Working Papers 1301, Queen's University, Department of Economics.

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