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Monopoly Pricing with Social Learning

  • Marco Ottaviani

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.

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Paper provided by ESRC Centre on Economics Learning and Social Evolution in its series ELSE working papers with number 035.

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Handle: RePEc:els:esrcls:035
Contact details of provider: Web page: http://else.econ.ucl.ac.uk/
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  1. Cooper, Russell & Ross, Thomas W, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 197-207, April.
  2. Dirk Bergemann & Juuso Valimaki, 1996. "Market Experimentation and Pricing," Cowles Foundation Discussion Papers 1122, Cowles Foundation for Research in Economics, Yale University.
  3. 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.
  4. Pesendorfer, Wolfgang, 1995. "Design Innovation and Fashion Cycles," American Economic Review, American Economic Association, vol. 85(4), pages 771-92, September.
  5. Welch, Ivo, 1992. " Sequential Sales, Learning, and Cascades," Journal of Finance, American Finance Association, vol. 47(2), pages 695-732, June.
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