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Abstract:
We consider a monopolist who sells identical objects of common but unknown value in a herding-prone environment. Buyers make their purchasing decisions sequentially, and rely on a private signal as well as previous buyers' actions to infer the common value of the object. The model applies to a variety of cases, such as the introduction of a new product or the sale of licenses to use a patent. We characterize the monopolist's optimal pricing strategy and its implications for the temporal pattern of prices and for herding. The analysis is performed under alternative assumptions about observability of prices. We find that when previous prices are observable, herding may, but need not, arise. In contrast, herding arises immediately when previous prices are unobservable and the seller's equilibrium strategy is a pure Markov strategy. While the possibility of social learning is present in the first case, it is absent in the second. Finally, we examine the seller's incentive to manipulate the buyers' evaluation of the object when buyers are naive. Using secret discounts the seller successfully interferes with social learning, and herding occurs in finite time.

Herding, Informational Cascades, Optimal Pricing

Abstract:
We study an auction with two distinct type of potential bidders: consumers who wish to purchase the item for their own consumption and middlemen who wish to purchase the item for the purpose of reselling it to the final consumers. Typically, the behavior of the former is studied under the private values paradigm, while the behavior of the latter is studied under the common values paradigm. We consider the possibility that both types of bidders compete in the same auction. We show that, if the middlemen have access to a larger market of consumers than the auctioneer, then the auctioneer may prefer to prevent the consumers from participating in the auction. The intuition for this result is that the presence of consumers in the auction creates a "winner's curse" effect for the middlemen: In equilibrium, the latter win when part of their customer base has relatively low valuations. This effect makes the middlemen more conservative in their bidding when they compete with consumers. In the model we consider, middlemen can access a market of N consumers by spending a marketing cost c. In the auction that the auctioneer arranges, apart from the middlemen, only one randomly chosen consumer shows up. We show that as long as c>0, the auctioneer prefers the restricted auction, under which the consumer is prevented from participating.

Abstract:
This paper endogenizes exclusive dealing through a distribution channel in auction markets. In particular, it is demonstrated that a seller prefers to exclude final consumers and sell only to re-sellers when these resellers can gain access, at a cost, to a sufficiently bigger market than the seller himself. The intuition behind this result is that the re-sellers can recoup their expenses for marketing the item by re-selling it to the final consumers. If some of the consumers participate in the first auction and are outbid by the resellers, this is an indication that their values for the item are relatively low. Outbidding part of their customer base is 'bad news' for the resellers, and this depresses their bids when final consumers compete with them. The socially optimal and revenue maximizing choices of auction format may not coincide. It is possible that restricting participation of consumers is socially optimal but privately sub-optimal and vice-versa. The results of this paper suggest that (i) the exclusion of final consumers in some auctions may not be driven by transaction costs considerations, and (ii) sellers should not necessarily sell directly to consumers even though new technologies, such as electronic/ Internet trading, allow them to do so at essentially zero cost.

Abstract:
It is occasionally observed that auctions are designed to exclude the participation of final consumers. Resellers are the only participants in these auctions. This behavior is sometimes rationalized on the basis of transaction costs: it is cheaper to deal with a small group of individuals on a frequent basis than it is to deal with a large group of individuals on an irregular basis. In this paper we demonstrate that there is no need to appeal to any transactions costs. In particular, we show that a seller would prefer to exclude final consumers from an auction and sell the item to resellers when these resellers can gain access, at a cost, to a sufficiently bigger market than the seller himself. The intuition behind our result is that the re-sellers can recoup their expense for buying the item by reselling it to the final consumers. If some of them participate in the first auction and are outbid by the resellers this is an indication that their values for the item are relatively low. Outbidding part of their customer base is 'bad news' for the resellers and this depresses their bids when final consumers are competing with them. In fact, in the particular framework that we examine here the intermediaries do not bid at all if final consumers are present. The socially optimal and revenue maximizing choices of auctions format are not guaranteed to coincide. Even though it is possible that restricting participation of consumers is both socially and privately (for the seller) optimal, it is also possible that restricting participating is socially optimal but privately sub-optimal and vice-versa.

Abstract:
This paper studies dynamic pricing by a monopolist selling to buyers who learn from each other's purchases. The price posted in each period serves to extract rent from the current buyer, as well as to control the amount of information transmitted to future buyers. As information increases future rent extraction, the monopolist has an incentive to subsidize learning by charging a price that results in information revelation. Nonetheless in the long run, the monopolist generally induces herding by either selling to all buyers or exiting the market.

Monopoly, public information, social learning, herd behavior, informational cascade