Social Learning and Delay in a Dynamic Model of Price Competition

44 Pages Posted: 24 Jul 2014  

Masaki Aoyagi

Osaka University - Institute of Social and Economic Research (ISER)

Manaswini Bhalla

Indian Institute of Management (IIMB), Bangalore

Hikmet Gunay

University of Manitoba; HIAS

Date Written: July 18, 2014

Abstract

This paper studies dynamic price competition over two periods between two firms selling differentiated durable goods to two buyers who are privately informed about their types, but have valuations of the two goods dependent on the other buyer's type. The firms' pricing strategy in period 1 must take into account the buyers' incentive to wait and learn from the other buyer's decision. We construct an equilibrium based on the key observation that the expected price of either good in period 2 is the same as its price in period 1 on and off the path of play. The equilibrium is shown to be non-preemptive in the sense that even if either firm fails to make a sale in period 1, it still makes a sale with positive probability in period 2. A characterization of the equilibrium is given in terms of the probability of delay as a function of the degree of interdependence between the two buyers.

Keywords: dynamic pricing, delay, social learning, duopoly, product differentiation, durable good, preemption, revenue management.

JEL Classification: C72, D82.

Suggested Citation

Aoyagi, Masaki and Bhalla, Manaswini and Gunay, Hikmet, Social Learning and Delay in a Dynamic Model of Price Competition (July 18, 2014). ISER Discussion Paper No. 909. Available at SSRN: https://ssrn.com/abstract=2470399

Masaki Aoyagi (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan
+81 6 6879 8557 (Phone)
+81 6 6878 2766 (Fax)

Manaswini Bhalla

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

Bannerghatta Road
Bangalore, Karnataka 560076
India

Hikmet Gunay

University of Manitoba ( email )

Economics
Winnipeg R3T 5V5, Manitoba
Canada

HIAS ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

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