Monopoly Pricing in the Presence of Social Learning

Davide Crapis (), Bar Ifrach (), Costis Maglaras () and Marco Scarsini
Additional contact information
Davide Crapis: Lyft, Inc., San Francisco, California 94107
Bar Ifrach: Airbnb, Inc., San Francisco, California 94103
Costis Maglaras: Columbia Business School, Columbia University, New York, New York 10027

Management Science, 2017, vol. 63, issue 11, 3586-3608

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. Consumers follow an intuitive, non-Bayesian decision rule. Under conditions that we identify, we show that consumers eventually learn the product’s quality. We show how the learning trajectory can be approximated in settings with high demand intensity via a mean-field approximation that highlights the dynamics of this learning process, its dependence on the price, and the market heterogeneity with respect to quality preferences. Two pricing policies are studied: a static price and one with a single price change. Finally, numerical experiments suggest that pricing policies that account for social learning may increase revenues considerably relative to policies that do not.

Keywords: social learning; information aggregation; bounded rationality; optimal pricing (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (24)

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https://doi.org/10.1287/mnsc.2016.2526 (application/pdf)

Related works:
Working Paper: Monopoly Pricing in the Presence of Social Learning (2012)
Working Paper: Monopoly Pricing in the Presence of Social Learning (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:63:y:2017:i:11:p:3586-3608

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