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Monopoly Pricing in the Presence of Social Learning

Authors: Ifrach, Bar
Maglaras, Costis
Scarsini, Marco
Keywords: learning, information aggregation, bounded rationality, pricing, optimal pricing.
Issue Date: 20-Dec-2011
Series/Report no.: NET Institute Working Papers;11_11
Abstract: A monopolist oers 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 eect 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-eld 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.
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