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Monopoly Pricing in the Presence of Social Learning

Author

Listed:
  • Davide Crapis

    () (Lyft, Inc., San Francisco, California 94107)

  • Bar Ifrach

    () (Airbnb, Inc., San Francisco, California 94103)

  • Costis Maglaras

    () (Columbia Business School, Columbia University, New York, New York 10027)

  • Marco Scarsini

    () (Department of Economics and Finance, Libera Università Internazionale degli Studi Sociali, 00197 Rome, Italy)

Abstract

A monopolist offers a product to a market of consumers with heterogeneous quality preferences. Although initially uninformed about the product quality, they learn by observing past purchase decisions and reviews of other consumers. Our goal is to analyze the social learning mechanism and its effect on the seller’s pricing decision. Consumers follow an intuitive, non-Bayesian decision rule. Under conditions that we identify, we show that consumers eventually learn the product’s quality. We show how the learning trajectory can be approximated in settings with high demand intensity via a mean-field approximation that highlights the dynamics of this learning process, its dependence on the price, and the market heterogeneity with respect to quality preferences. Two pricing policies are studied: a static price and one with a single price change. Finally, numerical experiments suggest that pricing policies that account for social learning may increase revenues considerably relative to policies that do not.

Suggested Citation

  • Davide Crapis & Bar Ifrach & Costis Maglaras & Marco Scarsini, 2017. "Monopoly Pricing in the Presence of Social Learning," Management Science, INFORMS, vol. 63(11), pages 3586-3608, November.
  • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:11:p:3586-3608
    DOI: 10.1287/mnsc.2016.2526
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    Cited by:

    1. Pnina Feldman & Yiangos Papanastasiou & Ella Segev, 2019. "Social Learning and the Design of New Experience Goods," Management Science, INFORMS, vol. 65(5), pages 1502-1519, April.
    2. Bar Ifrach & Costis Maglaras & Marco Scarsini & Anna Zseleva, 2019. "Bayesian Social Learning from Consumer Reviews," Operations Research, INFORMS, vol. 67(5), pages 1209-1221, September.

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    More about this item

    Keywords

    social learning; information aggregation; bounded rationality; optimal pricing;
    All these keywords.

    JEL classification:

    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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