A PYMNTS Company

Monopoly Pricing in the Presence of Social Learning

 |  December 12, 2012

Posted by D. Daniel Sokol

Bar Ifrach (Management Science and Engineering, Stanford University), Costis Maglaras (Columbia Business School, Columbia University) and Marco Scarsini (Dipartimento di Economia e Finanza, LUISS) explore Monopoly Pricing in the Presence of Social Learning

ABSTRACT: 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. Consumers follow an intuitive non-Bayesian decision rule and, under some conditions, eventually learn the product’s quality. We show how the learning trajectory can be approximated in settings with high demand intensity via a mean-field approximation that highlights the dynamics of this learning process, its dependence on the price, and the market heterogeneity with respect to quality preferences. Two pricing policies are studied: a static price, and one with a single price change. Finally, numerical experiments suggest that pricing policies that account for social learning may increase revenues considerably relative to policies that do not.