Dynamic monopoly pricing and herding

Bose, Subir; Orosel, Gerhard O.; Ottaviani, Marco; Vesterlund, Lise

doi:10.1111/j.1756-2171.2006.tb00063.x

Cited by 70 publications

(64 citation statements)

References 23 publications

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“…13 Bose et al (2005aBose et al ( , 2005b) also find convexity of profits, in their case in the prior belief. Thus the firm, which does not know its own product quality, will want to release information -setting a high price to early customers reveals information about their private signals, moving the prior up or down, while at a low price everybody buys so nothing is revealed.…”

Section: Optimality Of Extreme Reviewersmentioning

confidence: 96%

The optimal choice of pre-launch reviewer

Gill

Sgroi

2012

Journal of Economic Theory

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We consider the impact of pre-launch reviews on sales of products of quality unknown to consumers. Sales occur simultaneously after consideration by a reviewer with a known level of bias. Consumers observe the reviewer's decision and a private signal. Using convex analysis we prove three major results: (i) a monopolist, which can choose the type of reviewer and the price conditional on the chosen reviewer's decision, will always want to have its product reviewed; (ii) choosing an extreme reviewer, that is either the toughest or softest reviewer type available, is always optimal; and (iii) the switch from the toughest to softest reviewer occurs when the precision of private information reaches a calculable threshold. The paper provides a justification for the existence of heavily biased reviews and tests, and also suggests a clear course of action for firms in different situations. For example, an entrant with a very innovative product should risk a tough pre-launch test, while an incumbent with a new product that provides only a small change over an existing one would do best using a soft pre-launch review.

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Section: Optimality Of Extreme Reviewersmentioning

confidence: 96%

The optimal choice of pre-launch reviewer

Gill

Sgroi

2012

Journal of Economic Theory

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“…We note that the beneficial effects of SL on expected profit when the firm adjusts prices dynamically have been established previously in the literature, but under the assumption that consumers are non-strategic (e.g., Bose et al 2006, Ifrach et al 2013). Proposition 8 generalizes this finding to the case of forward-looking consumers.…”

Section: First-period Pricing and Purchasing Strategiesmentioning

confidence: 99%

“…Notice that when γ = 0, the SL process is essentially inactive: the updated belief,q u , is identical to the prior belief,q p . This case reflects situations in which SL is either (i) irrelevant, because there is no ex ante quality uncertainty (i.e., σ p → 0) and therefore nothing to be learned from product reviews, 4 Since the firm and consumers hold the same prior belief, firm actions in our model cannot convey any additional information on product quality to the consumers (i.e., there is no scope for signalling); this informational structure is commonly assumed in the SL literature to focus attention on the peer-to-peer learning process (e.g., Bergemann and Välimäki 1997, Bose et al 2006, Bose et al 2008, YU et al 2013b). Furthermore, although we do not model expert/critic reviews explicitly, these may take part in forming the public prior belief; Dellarocas et al (2007) find that there is generally little overlap between the informational content of critic reviews and that of consumer reviews.…”

Section: Model Descriptionmentioning

confidence: 99%

“…The seminal papers by Banerjee (1992) and Bikhchandani et al (1992) illustrate that when the actions (e.g., adoption decisions) of the first few agents (e.g., consumers) reveal their private information regarding some unobservable state of the world (e.g., product quality), subsequent consumers may disregard their own private information and simply mimic the decision of their predecessor. Bose et al (2006Bose et al ( , 2008 illustrate how a monopolist employing dynamic pricing can use its pricing decision to control the amount of information that can be inferred by future consumers from the purchasing decision of the current consumer. Perhaps more relevant to the post-Internet era are models in which SL occurs based on reviews which reveal ex post consumer experiences (as is the case in our model), rather than actions which reveal ex ante private information.…”

Section: Literature Reviewmentioning

confidence: 99%

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Dynamic Pricing in the Presence of Social Learning and Strategic Consumers

2017

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When a product of uncertain quality is first introduced, consumers may be enticed to strategically delay their purchasing decisions in anticipation of the product reviews of their peers. This paper investigates how the presence of social learning interacts with the adoption decisions of strategic consumers and the dynamicpricing decisions of a monopolist firm, within a simple two-period model. When the firm commits to a price path ex ante (pre-announced pricing), we show that the presence of social learning increases the firm's ex ante expected profit, despite the fact that it exacerbates consumers' tendency to strategically delay their purchase. As opposed to following a price-skimming policy which is always optimal in the absence of social learning, we find that, for most model parameters, the firm will announce an increasing price plan. When the firm does not commit to a price path ex ante (responsive pricing), interestingly, the presence of social learning has no effect on strategic purchasing delays. Under this pricing regime, social learning remains beneficial for the firm and prices may either rise or decline over time, with the latter being ex ante more likely.Furthermore, we illustrate that contrary to results reported in existing literature, in settings characterized by social learning, price-commitment is generally not beneficial for a firm facing strategic consumers.

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“…Bose, Orosel, Ottaviani, and Vesterlund (2006) consider a variation of the classic Bayesian model of social learning when a monopolist and agents are equally uninformed about the value of the good. The monopolist can change the price dynamically to extract revenue and to control the accumulation of information.…”

Section: Literature Reviewmentioning

confidence: 99%

Monopoly Pricing in the Presence of Social Learning

Crapis¹,

et al. 2017

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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. 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-field 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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Dynamic monopoly pricing and herding

Cited by 70 publications

References 23 publications

The optimal choice of pre-launch reviewer

The optimal choice of pre-launch reviewer

Dynamic Pricing in the Presence of Social Learning and Strategic Consumers

Monopoly Pricing in the Presence of Social Learning

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