Monopoly Pricing in the Presence of Social Learning

Bar Ifrach (), Costis Maglaras () and Marco Scarsini
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Bar Ifrach: Management Science and Engineering, Stanford University
Costis Maglaras: Columbia Business School, Columbia University

No 12-01, 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. Consumers follow an intuitive non-Bayesian decision rule and, under some conditions, 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: 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: 35 pages
Date: 2012-08, Revised 2012-09
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-mic
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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 (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:net:wpaper:1201

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