Try before you buy: A theory of dynamic information acquisition

Ruitian Lang

Journal of Economic Theory, 2019, vol. 183, issue C, 1057-1093

Abstract: This paper develops a model of dynamic information acquisition where a buyer acquires information about a product, and a monopoly seller sets the price of her product anticipating the buyer's behavior. It finds that the buyer makes a purchase decision when his expected gain from trade hits one of two boundaries which are deterministic functions of time. Those boundaries are independent of the buyer's prior value. The seller's profit is increasing in the buyer's cost of information if and only if the buyer's prior purchase probability is above fifty percent. In analyzing the problem, a close connection between the information acquisition problem and the theory of American options is established and exploited.

Keywords: Sequential sampling; Diffusion process; Continuous time; Monopoly pricing (search for similar items in EconPapers)
JEL-codes: C61 D42 G13 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:183:y:2019:i:c:p:1057-1093

DOI: 10.1016/j.jet.2019.07.014

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