Incentives through consumer learning about tastes |
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| Institution: | 1. Department of Civil and Environmental Engineering, Northwestern University, Evanston, IL 60208, USA;2. Department of Civil and Environmental Engineering, Michigan State University, East Lansing, MI 48825, USA;3. School of Transportation and Logistics, Southwest Jiaotong University, Chengdu, China;4. School of Business Administration, Southwestern University of Finance and Economics, Chengdu, PR China;1. Toulouse School of Economics (IAE, IDEI, CRM), France;2. University of Zurich, Institute of Banking and Finance, Switzerland;3. Toulouse School of Economics (IDEI), France |
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| Abstract: | We consider a long-lived firm that faces an infinite sequence of finitely-lived consumers. In each period, the firm can exert either high or low effort, which is the firm's private information. When consumers learn about the firm's talent from the outcomes of previous transactions, there exists no equilibrium in which the firm always exerts high effort. However, when consumers learn about their own tastes, such an equilibrium can exist. Consumer learning about tastes therefore is an alternative to reputational concerns that produces stable incentives. We discuss the implications of this mechanism for advertising, advertising content, and consumer education. |
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