Monopoly pricing in the binary herding model

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

doi:10.1007/s00199-007-0313-9

Cited by 63 publications

(61 citation statements)

References 15 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…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: 89%

The optimal choice of pre-launch reviewer

Gill

Sgroi

2012

Journal of Economic Theory

View full text Add to dashboard Cite

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.

show abstract

Section: Optimality Of Extreme Reviewersmentioning

confidence: 89%

The optimal choice of pre-launch reviewer

Gill

Sgroi

2012

Journal of Economic Theory

View full text Add to dashboard Cite

show abstract

“…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%

“…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%

Dynamic Pricing in the Presence of Social Learning and Strategic Consumers

2017

View full text Add to dashboard Cite

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.

show abstract

“…Finally, Bose et al (2008) model the interaction between an exogenous sequence of informed buyers and a monopolist seller who sets the price in order to learn from the buyers' decisions. As in the literature mentioned so far, prices adjust to reflect the information revealed from past trades.…”

Section: Other Related Literaturementioning

confidence: 99%

Path-dependent behavior and information leakage in financial markets

Testa

2018

Econ Theory

View full text Add to dashboard Cite

I develop a new mechanism that exploits the leakage of information in financial markets to deliver herding and contrarian behavior, which I label "path-dependent behavior." The mechanism is related to the role of word-of-mouth communication in transmitting information about stocks among traders. In practice, this occurs via dealing interactions and a notable phenomenon called "the broker's ear." I find that, for a suitably long trading history, path-dependent behavior is more likely the better the quality of traders' private information. Herding in the direction of the true state of the world occurs almost surely for any initial beliefs, and it improves price informativeness. An external observer who underestimates/overestimates the rate of information leakage will always overestimate/underestimate the quality of private information. I also show that when the quality of private information is very high and the asymmetry of information between traders and market maker is pronounced, the market is expected to herd 50% of the time. Nonetheless, this has little impact on order imbalance, excluding cases exhibiting catastrophic price behavior.

show abstract

Monopoly pricing in the binary herding model

Abstract: Monopoly, Public information, Social learning, Herd behavior, Informational cascade, Binary signal, D83, L12, L15,

Cited by 63 publications

References 15 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

Path-dependent behavior and information leakage in financial markets

Contact Info

Product

Resources

About