DP1744 Price Dynamics and Consumer Learning

• Xavier Vives Ramon Caminal
30 Nov 1997

This paper studies the price dynamics induced by strategic firm behaviour in the presence of consumer learning about the uncertain quality differential of the products offered by a duopoly. It is found that consumers learn slowly and also that prices converge slowly to full-information levels. A consequence is that the incentives of firms to manipulate consumers? beliefs are relatively persistent. Although pricing tends to be aggressive at the early stages, and average prices eventually increase over time, price wars may occur at intermediate stages of the product life-cycle.