DP1744 Price Dynamics and Consumer Learning

Author(s): Ramon Caminal, Xavier Vives
Publication Date: November 1997
Keyword(s): Learning, Market Shares, oligopoly pricing
JEL(s): D43, D83, L13
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1744

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.