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Strategic Firms and Endogenous Consumer Emulation

  • Philipp Kircher

    ()

    (Department of Economics, University of Pennsylvania)

  • Andrew Postlewaite

    ()

    (Department of Economics, University of Pennsylvania)

Better informed consumers may be treated preferentially by firms since their consumption serves as a quality signal for other customers. For normal goods this results in wealthy individuals being treated better than poor individuals. We investigate this phenomenon in an equilibrium model of social learning with heterogeneous consumers and firms that act strategically. Consumers search for high quality firms and condition their choices on observed actions of other consumers. When they observe consumers who are more likely to have identified a high quality firm, uninformed individuals will optimally emulate those consumers. One group of consumers arises endogenously as “leaders” whose consumption behavior is emulated. Follow-on sales induce firms to give preferential treatment to these lead consumers, which reinforces their learning.

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File URL: http://economics.sas.upenn.edu/system/files/working-papers/08-003.pdf
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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 08-003.

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Length: 28 pages
Date of creation: 02 Jan 2008
Date of revision:
Handle: RePEc:pen:papers:08-003
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  1. Dirk Bergemann & Juuso Valimaki, 1999. "Experimentation in Markets," Cowles Foundation Discussion Papers 1214, Cowles Foundation for Research in Economics, Yale University.
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  17. repec:rje:randje:v:37:y:2006:i:4:p:910-928 is not listed on IDEAS
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