Group for Research in Decision Analysis

Pricing strategies under social learning and herding behavior

Qiao Zhang HEC Montréal/Université Tianjin, China

We consider a monopolist selling an experience product to consumers over two periods. Product's quality is the firm's private information, and it is unknown to all consumers. Consumers who decide to buy the product in the first period, provides, through their online reviews, a quality signal to potential second-period buyers who are also influenced by a herding (imitation) effect. The firm chooses its pricing strategy to signal its product quality when maximizing its profit. One interesting result is that the firm does not always benefit from the herding effect, but consumers are always better off. Social learning helps to improve the firm's profit, and benefits consumers when the signal accuracy is imperfect, but damages them when the signal is perfect. Dynamic pricing is preferred by the firm with the high quality when it is sufficiently farsighted and the herding effect is moderate. Preannounced pricing is a better choice for the firm in most cases, but always hurts consumers' benefits.

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