Monopoly pricing in the binary herding model |
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Authors: | Subir Bose Gerhard Orosel Marco Ottaviani Lise Vesterlund |
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Institution: | (1) Department of Economics, University of Illinois at Urbana-Champaign, Champaign, IL 61820, USA;(2) Department of Economics, University of Vienna, Hohenstaufengasse 9, A-1010 Vienna, Austria;(3) Economics Subject Area, London Business School, Sussex Place, London, NW1 4SA, England;(4) Department of Economics, University of Pittsburgh, 4916 WW Posvar Hall, Pittsburgh, PA 15260, USA |
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Abstract: | How should a monopolist price when selling to buyers who learn from each other’s decisions? Focusing on the case in which the common value of the good is binary and each buyer receives a binary private signal about that value, we completely answer this question for all values of the production cost, the precision of the buyers’ signals, and the seller’s discount factor. Unexpectedly, we find that there is a region of parameters for which learning stops at intermediate and at extreme beliefs, but not at beliefs that lie between those intermediate and extreme beliefs. |
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Keywords: | Monopoly Public information Social learning Herd behavior Informational cascade Binary signal |
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