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Dynamic Pricing Under Social Learning with Strategic Consumers

29 Pages Posted: 20 Jul 2012 Last revised: 1 Aug 2014

Manaswini Bhalla

Indian Institute of Management (IIMB), Bangalore

Date Written: June 30, 2012

Abstract

A monopolist uses prices as an instrument to influence consumers' belief about the unknown quality of its product. Consumers observe prices and sales in earlier periods to learn about the product. Every period they decide whether to consume the product or to wait for a lower price in future. We solve for the optimal price strategy of a monopolist. We show that for certain range of beliefs prices increase over the period of time. Per period profits increase over the period of time. We find that the firm encourages social learning for a greater range of beliefs and has greater expected revenue when it faces consumers that can delay their purchase decision versus when they can’t.

Keywords: Strategic Consumer, Social Learning, Pricing Durable Goods

JEL Classification: C73, D21, D42, D62, D81, D82, D83, M2, M31

Suggested Citation

Bhalla, Manaswini, Dynamic Pricing Under Social Learning with Strategic Consumers (June 30, 2012). IIM Bangalore Research Paper No. 367. Available at SSRN: https://ssrn.com/abstract=2114054 or http://dx.doi.org/10.2139/ssrn.2114054

Manaswini Bhalla (Contact Author)

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

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