The welfare costs of informationally efficient prices

Moran Koren and Manuel Mueller-Frank

Games and Economic Behavior, 2022, vol. 131, issue C, 186-196

Abstract: Consider a market with two substitute products and a sequence of consumers. The consumers are uncertain about the quality of each product but obtain some private information about it. Additionally, each consumer observes the purchase decisions of her predecessors but not their private information. Absent prices, the standard logic of herding is that all but finitely many consumers may, with positive probability, select the lower quality product. One perspective in the literature is that informationally efficient market prices can resolve the herding inefficiency and induce asymptotic learning where the beliefs of consumers about product qualities converge to the truth. This paper shows that, while informationally efficient prices induce asymptotic learning, they also inflict a welfare cost. That is, we show that the expected welfare is decreasing in the frequency with which prices are set to be informationally efficient.

Keywords: Dynamic markets; Dynamic prices; Herding; Efficient prices; Allocational efficiency; Information aggregation; Social learning; Welfare; Total surplus; Asymptotic learning (search for similar items in EconPapers)
JEL-codes: D21 D60 D82 D83 L15 L20 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:131:y:2022:i:c:p:186-196

DOI: 10.1016/j.geb.2021.11.014

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