Dynamic Pricing in the Presence of Social Learning and Strategic Consumers

Abstract

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.

Crowdsourcing Exploration

“…5 The probability density function of a Beta(s, f ) random variable is given by g(x; s, f ) = x s−1 (1−x) f −1 B(s,f ), for x ∈ [0, 1]. 6 The platform and the consumers hold the same prior belief, so that platform actions (e.g., choice of informationprovision policy) do not convey any additional information on provider quality to the consumers (e.g., Bergemann and Välimäki 1997, Bose et al 2006, Papanastasiou and Savva 2016.7 Commitment is a reasonable assumption in the context of online platforms, where information provision occurs on the basis of pre-decided algorithms and the large volume of products/services hosted renders ad-hoc adjustments of the automatically-generated content prohibitively costly (see also §5.4, where this assumption is relaxed).…”

“…, for x ∈ [0, 1]. 6 The platform and the consumers hold the same prior belief, so that platform actions (e.g., choice of informationprovision policy) do not convey any additional information on provider quality to the consumers (e.g., Bergemann and Välimäki 1997, Bose et al 2006, Papanastasiou and Savva 2016.…”

Pricing Strategy and Carbon Emission Abatement under Cap-and-Trade Regulation Considering Social Learning

“…When a manufacturer sells two alternatives, social learning decides the operation of the manufacturer. By setting the proportion of updated belief and the prior belief, Papanastasiou and Savova [23] analyze the influence of social learning upon product quality on a firm's pricing strategy. Ifrach et al [24] suggests that when strategic consumers exist in the market, social learning helps firms to make more profit.…”

Selling Innovative Products in the Presence of Externalities

“…There have been many recent studies in the operations management and marketing disciplines investigating the former setting-impact of social learning free from externality. These studies conceptualize innovations as products whose quality is unknown to consumers and focus on consumers' social learning, e.g., via posted reviews by early adopters (Papanastasiou andSavva 2016, Yu et al 2016). Instead, we study the latter setting-impact of externality without the traditional social learning, which has received limited attention in the literature.…”