Dynamic pricing in the presence of social learning and strategic consumers

Paganastasiou, Y and Savva, N (2016) Dynamic pricing in the presence of social learning and strategic consumers. Management Science, 63 (4). pp. 919-939. ISSN 0025-1909

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Official URL: http://pubsonline.informs.org/doi/full/10.1287/mns...

Abstract

When a product of uncertain quality is first introduced, consumers may choose to strategically delay their purchasing decisions in anticipation of the product reviews of their peers. This paper investigates how the presence of social learning affects the strategic interaction between a dynamic-pricing monopolist and a forward-looking consumer population, within a simple two-period model. Our analysis yields three main insights. First, we find that the presence of SL has significant structural implications for optimal pricing policies: In the absence of social learning, decreasing price plans are always preferred by the firm; by contrast, in the presence of social learning we find that (i) if the firm commits to a price path ex ante (pre-announced pricing), an increasing price plan is typically announced, while (ii) if the firm adjusts price dynamically (responsive pricing), prices are initially low and may either rise or decline over time. Second, we establish that under both pre-announced and responsive pricing, even though the social learning process exacerbates strategic consumer behavior (i.e., increases strategic purchasing delays), its presence results in an increase in expected firm profit. Third, we illustrate that contrary to results reported in existing literature on strategic consumer behavior, in settings where social learning is significantly influential pre-announced pricing policies are generally not benefcial for the firm.

Item Type: Article
Additional Information: © 2016 INFORMS
Subjects: C > Consumer behaviour
P > Price theory
G > Game theory
Subject Areas: Management Science and Operations
DOI: 10.1287/mnsc.2015.2378
Date Deposited: 17 May 2016 18:20
Last Modified: 19 Apr 2017 14:20
URI: http://lbsresearch.london.edu/id/eprint/200

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