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Herding Prices: Social Learning and Dynamic Competition in Duopoly

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  • Azova, Arina
  • Lukyanov, Georgy

Abstract

We embed observational learning (BHW) in a symmetric duopoly with random arrivals and search frictions. With fixed posted prices, a mixed-strategy pricing equilibrium exists and yields price dispersion even with ex-ante identical firms. We provide closed-form cascade bands and show wrong cascades occur with positive probability for interior parameters, vanishing as signals become precise or search costs fall; absorption probabilities are invariant to the arrival rate. In equilibrium, the support of mixed prices is connected and overlapping; its width shrinks with signal precision and expands with search costs, and mean prices comove accordingly. Under Calvo price resets (Poisson opportunities), stationary dispersion and mean prices fall; when signals are sufficiently informative, wrong-cascade risk also declines. On welfare, a state-contingent Pigouvian search subsidy implements the planner’s cutoff. Prominence (biased first visits) softens competition and depresses welfare; neutral prominence is ex-ante optimal.

Suggested Citation

  • Azova, Arina & Lukyanov, Georgy, 2025. "Herding Prices: Social Learning and Dynamic Competition in Duopoly," TSE Working Papers 25-1685, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:131066
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    References listed on IDEAS

    as
    1. Georgy Lukyanov, 2025. "Learning from Experts with Uncertain Precision," Papers 2509.01264, arXiv.org, revised Jan 2026.
    2. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 797-817.
    3. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
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    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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