Monopoly Pricing in the Presence of Social Learning

Bar Ifrach (bifrach14@gsb.columbia.edu), Costis Maglaras (c.maglaras@gsb.columbia.edu) and Marco Scarsini
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Bar Ifrach: Decision, Risk, and Operations, Columbia Business School
Costis Maglaras: Decision, Risk, and Operations, Columbia Business School

No 11-11, Working Papers from NET Institute

Abstract: A monopolist offers a product to a market of consumers with heterogeneous quality preferences. Although initially uninformed about the product quality, they learn by observing past purchase decisions and reviews of other consumers. Our goal is to analyze the social learning mechanism and its effect on the seller's pricing decision. This analysis borrows from the literature on social learning and on pricing and revenue management. Consumers follow a naive decision rule and, under some conditions, eventually learn the product's quality. Using mean-field approximation, the dynamics of this learning process are characterized for markets with high demand intensity. The relationship between the price and the speed of learning depends on the heterogeneity of quality preferences. Two pricing strategies are studied: a static price and a single price change. Properties of the optimal prices are derived. Numerical experiments suggest that pricing strategies that account for social learning may increase revenues considerably relative to strategies that do not.

Keywords: learning; information aggregation; bounded rationality; pricing; optimal pricing (search for similar items in EconPapers)
JEL-codes: D49 D83 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2011-11, Revised 2011-11
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Monopoly Pricing in the Presence of Social Learning (2017)
Working Paper: Monopoly Pricing in the Presence of Social Learning (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:net:wpaper:1111

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