Price Experimentation with Strategic Buyers

Review of Economic Design, Vol. 12, No. 3, pp. 165-187, 2008

26 Pages Posted: 14 Jul 2003 Last revised: 29 Oct 2016

See all articles by Oksana Loginova

Oksana Loginova

University of Missouri

Curtis R. Taylor

Duke University - Department of Economics

Date Written: June 1, 2008

Abstract

A two-period model in which a monopolist endeavors to learn about the permanent demand parameter of a specific repeat buyer is investigated. The buyer may strategically reject the seller's first-period offer for one of two reasons. First, in order to conceal information (i.e., to pool), a high-valuation buyer may reject high prices that would never be accepted by a low-valuation buyer. Second, in order to reveal information (i.e., to signal), a low-valuation buyer may reject low prices that would always be accepted by a high-valuation buyer. Given this, the seller often finds it optimal to post prices that reveal no useful information. Indeed, in the equilibrium where there is no signaling, the seller never charges an informative first-period price. Learning may occur in the equilibrium where there is maximal signaling, but the scope for learning is quite limited even in this case. Indeed, in order to preempt information transmission through signaling, the seller may be induced to set a first-period price strictly below the buyer's lowest possible valuation.

Keywords: price experimentation, learning, strategic rejections

JEL Classification: C73, D81, D82

Suggested Citation

Loginova, Oksana and Taylor, Curtis R., Price Experimentation with Strategic Buyers (June 1, 2008). Review of Economic Design, Vol. 12, No. 3, pp. 165-187, 2008. Available at SSRN: https://ssrn.com/abstract=412600 or http://dx.doi.org/10.2139/ssrn.412600

Oksana Loginova

University of Missouri ( email )

118 Professional Building
Columbia, MO 65211
United States
1-573-882-0063 (Phone)

HOME PAGE: http://web.missouri.edu/~loginovao/

Curtis R. Taylor (Contact Author)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1827 (Phone)
919-684-8974 (Fax)

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