IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Monopoly Pricing in the Presence of Social Learning

  • Bar Ifrach

    ()

    (Management Science and Engineering, Stanford University)

  • Costis Maglaras

    ()

    (Columbia Business School, Columbia University)

  • Marco Scarsini

    ()

    (Dipartimento di Economia e Finanza, LUISS)

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 and, under some conditions, 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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.NETinst.org/Ifrach_12-01.pdf
Download Restriction: no

Paper provided by NET Institute in its series Working Papers with number 12-01.

as
in new window

Length: 35 pages
Date of creation: Aug 2012
Date of revision: Sep 2012
Handle: RePEc:net:wpaper:1201
Contact details of provider: Web page: http://www.NETinst.org/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Caminal, Ramon & Vives, Xavier, 1997. "Price Dynamics and Consumer Learning," CEPR Discussion Papers 1744, C.E.P.R. Discussion Papers.
  2. Smith, L. & Sorensen, P., 1996. "Pathological Outcomes of Observational Learning," Economics Papers 115, Economics Group, Nuffield College, University of Oxford.
  3. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  4. Arthur Campbell, 2013. "Word-of-Mouth Communication and Percolation in Social Networks," American Economic Review, American Economic Association, vol. 103(6), pages 2466-98, October.
  5. Ellison, Glenn & Fudenberg, Drew, 1993. "Rules of Thumb for Social Learning," Scholarly Articles 3196332, Harvard University Department of Economics.
  6. Ellison, Glenn & Fudenberg, Drew, 1995. "Word-of-Mouth Communication and Social Learning," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 93-125, February.
  7. Goeree, Jacob & Palfrey, Thomas & Rogers, Brian, 2003. "Social learning with private and common values," Working Papers 1187, California Institute of Technology, Division of the Humanities and Social Sciences.
  8. Bose, Subir & Orosel, Gerhard O & Ottaviani, Marco & Vesterlund, Lise, 2005. "Dynamic Monopoly Pricing and Herding," CEPR Discussion Papers 5003, C.E.P.R. Discussion Papers.
  9. Dirk Bergemann & Juuso Valimaki, 1996. "Market Diffusion with Two-Sided Learning," Cowles Foundation Discussion Papers 1138, Cowles Foundation for Research in Economics, Yale University.
  10. Abhijit Banerjee & Drew Fudenberg, 2010. "Word of Mouth Learning," Levine's Working Paper Archive 723, David K. Levine.
  11. Daron Acemoglu & Asuman Ozdaglar, 2011. "Opinion Dynamics and Learning in Social Networks," Dynamic Games and Applications, Springer, vol. 1(1), pages 3-49, March.
  12. Vives, Xavier, 1997. "Learning from Others: A Welfare Analysis," Games and Economic Behavior, Elsevier, vol. 20(2), pages 177-200, August.
  13. Bergemann, Dirk & Valimaki, Juuso, 2000. "Experimentation in Markets," Review of Economic Studies, Wiley Blackwell, vol. 67(2), pages 213-34, April.
  14. Michael Luca, 2011. "Reviews, Reputation, and Revenue: The Case of Yelp.com," Harvard Business School Working Papers 12-016, Harvard Business School.
  15. Ali Jadbabaie & Pooya Molavi & Alvaro Sandroni & Alireza Tahbaz-Salehi, 2009. "Non-Bayesian Social Learning, Third Version," PIER Working Paper Archive 11-025, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 05 Aug 2011.
  16. Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
  17. Bimpikis, Kostas & Ozdaglar, Asuman & Acemoglu, Daron, 2014. "Dynamics of information exchange in endogenous social networks," Theoretical Economics, Econometric Society, vol. 9(1), January.
  18. Senthil Veeraraghavan & Laurens Debo, 2009. "Joining Longer Queues: Information Externalities in Queue Choice," Manufacturing & Service Operations Management, INFORMS, vol. 11(4), pages 543-562, April.
  19. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
  20. 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.
  21. Helios Herrera & Johannes Horner, 2009. "Biased Social Learning," Cowles Foundation Discussion Papers 1738, Cowles Foundation for Research in Economics, Yale University.
  22. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:net:wpaper:1201. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nicholas Economides)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.