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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. Glenn Ellison & Drew Fudenberg, 1995. "Word-of-Mouth Communication and Social Learning," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 93-125.
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  7. Abhijit Banerjee & Drew Fudenberg, 2010. "Word of Mouth Learning," Levine's Working Paper Archive 723, David K. Levine.
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  11. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
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  13. Mark Rosenzweig & Andrew D. Foster, . "Learning by Doing and Learning from Others: Human Capital and Technical Change in Agriculture," Home Pages _068, University of Pennsylvania.
  14. Burnkrant, Robert E & Cousineau, Alain, 1975. " Informational and Normative Social Influence in Buyer Behavior," Journal of Consumer Research, Oxford University Press, vol. 2(3), pages 206-15, December.
  15. 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.
  16. Dennis E. Smallwood & John Conlisk, 1979. "Product Quality in Markets Where Consumers are Imperfectly Informed," The Quarterly Journal of Economics, Oxford University Press, vol. 93(1), pages 1-23.
  17. Wolinsky, Asher, 1990. "Information Revelation in a Market with Pairwise Meetings," Econometrica, Econometric Society, vol. 58(1), pages 1-23, January.
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