Pricing Strategies Under Behavioral Observational Learning in Social Networks

Abstract

The increasing pervasiveness of social networks allows users to share purchase behaviors with their online friends. In the present study, we examine optimal pricing strategies of a monopolistic firm using an analytical model that accounts for behavioral observational learning in social networks. We show that a seller could potentially control the information available to future customers and induce behavioral observational learning by using an information-revealing pricing strategy. This result suggests that offering introductory discounts is not always an effective method to boost purchases in social networks. It could prevent the behavioral observational learning that would increase future customers’ willingness to pay.

Keywords: observational learning, social networks, optimal pricing

JEL Classification: D83, D42, M15