DP5003 Dynamic Monopoly Pricing and Herding

Author(s): Subir Bose, Gerhard O Orosel, Marco Ottaviani, Lise Vesterlund
Publication Date: April 2005
Keyword(s): herd behaviour, informational cascade, monopoly, public information, social learning
JEL(s): D83, L12, L15
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5003

This paper studies dynamic pricing by a monopolist selling to buyers who learn from each other?s purchases. The price posted in each period serves to extract rent from the current buyer, as well as to control the amount of information transmitted to future buyers. As information increases future rent extraction, the monopolist has an incentive to subsidize learning by charging a price that results in information revelation. Nonetheless in the long run, the monopolist generally induces herding by either selling to all buyers or exiting the market.