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Monopoly Pricing with Social Learning

Author

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  • Marco Ottaviani

Abstract

This paper analyzes optimal dynamic pricing by a monopolist in a market where buyers learn about the quality of the good by observing each other. In the initial phase the monopolist prefers prices that allow more transmission of information from current to future buyers. Eventually the monopolist will stop the learning process, either by exiting or by capturing the entire market. Once an expensive good becomes popular, it is optimal for the monopolist to reduce the price and to sell to all consumers. The expected long-run inefficiency is shown to be generally lower than in the model with fixed prices. Efficiency can be enhanced by pricing below marginal cost.

Suggested Citation

  • Marco Ottaviani, "undated". "Monopoly Pricing with Social Learning," ELSE working papers 035, ESRC Centre on Economics Learning and Social Evolution.
  • Handle: RePEc:els:esrcls:035
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    File URL: ftp://ftp.repec.org/RePEc/els/esrcls/monopoly.pdf
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    References listed on IDEAS

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    1. Pesendorfer, Wolfgang, 1995. "Design Innovation and Fashion Cycles," American Economic Review, American Economic Association, vol. 85(4), pages 771-792, September.
    2. Ernst R. Berndt & Linda T. Bui & David H. Lucking-Reiley & Glen L. Urban, 1996. "The Roles of Marketing, Product Quality, and Price Competition in the Growth and Composition of the U.S. Antiulcer Drug Industry," NBER Chapters,in: The Economics of New Goods, pages 277-328 National Bureau of Economic Research, Inc.
    3. Dirk Bergemann & Juuso Valimaki, 1996. "Market Experimentation and Pricing," Cowles Foundation Discussion Papers 1122, Cowles Foundation for Research in Economics, Yale University.
    4. Russell Cooper & Thomas W. Ross, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Oxford University Press, vol. 51(2), pages 197-207.
    5. 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.
    6. Welch, Ivo, 1992. " Sequential Sales, Learning, and Cascades," Journal of Finance, American Finance Association, vol. 47(2), pages 695-732, June.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. 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.
    2. Heski Bar-Isaac, 2001. "Self-Confidence and Survival," FMG Discussion Papers dp395, Financial Markets Group.
    3. 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), vol. 37(2), pages 203-241, November.

    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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