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Monopoly pricing in the binary herding model

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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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Correspondence to Marco Ottaviani.

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This paper generalizes the model and the results contained in “Monopoly pricing with social learning” by Ottaviani (1996) and “Optimal pricing and endogenous herding” by Bose, Orosel, and Vesterlund (2001). Ottaviani (1996) first formulated the problem and derived implications for learning and welfare. Independently, Bose, Orosel, and Vesterlund (2001) formulated a similar model but with a different focus on the dependence of the solution on the model’s parameters. Bose, Orosel, and Vesterlund’s team and Ottaviani then joined efforts to partially characterize the solution for the general case with a finite number of signal realizations (Bose et al. 2006), and to provide a full characterization of the equilibrium for the case with symmetric binary signals, which is done in the present paper. Vesterlund thanks the NSF for financial support.

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Bose, S., Orosel, G., Ottaviani, M. et al. Monopoly pricing in the binary herding model. Econ Theory 37, 203–241 (2008).

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