Market Diffusion with Consumer-Based Bilateral Learning
Studies in Applied Economics, Vol. 5, pp 1-20, December 2011
26 Pages Posted: 13 May 2009 Last revised: 4 Feb 2013
Date Written: September 5, 2011
This paper analyzes the market diffusion of a new product whose quality is uncertain. Consumers learn the product quality by observing the history of market outcomes. Firms cannot observe how consumers evaluate the product quality; instead, they learn by observing consumer behavior. New entry occurs gradually because of informational externalities. This dual uncertainty contributes to an S-shaped diffusion of the new product with declining prices.
Keywords: Experience Goods, Quality Uncertainty, Bilateral Learning, S-shaped Diffusion
JEL Classification: D11, L11, L14
Suggested Citation: Suggested Citation