Advertisement

On the consumer problem under an informational externality

  • Marc SantuginiEmail author
Research Article
  • 18 Downloads

Abstract

We use the Hendricks and Kovenock (RAND J Econ 20(2):164–182, 1989) framework to study the consumer problem under an informational externality. The informational externality arises when each consumer of a social network is endowed with private information regarding the quality of a good. In such situations, the past purchasing decisions of the consumers are informative and, thus, are used as partially revealing signals of private information. Asymmetric information and the observability of actions render the consumer problem dynamic and strategic because the purchasing decision of a consumer affects the other consumers’ future payoffs through the learning process. We show that there exists a unique symmetric Bayesian–Nash equilibrium. The informational externality increases the likelihood for a consumer to refrain from purchasing the good immediately to make a more informed decision in the future.

Keywords

Informational externality Social learning Bayesian updating 

JEL Classifications

D10 

Notes

References

  1. Alexander-Cook, K., Bernhardt, D., Roberts, J.: Riding free on the signals of others. J. Public Econ. 67(1), 25–43 (1998)CrossRefGoogle Scholar
  2. Banerjee, A.: A simple model of herd behavior. Q. J. Econ. 107(3), 797–817 (1992)CrossRefGoogle Scholar
  3. Bikhchandani, S., Hirshleifer, D., Welch, I.: A theory of fads, fashion, custom, and cultural change as informational cascades. J. Political Econ. 100(5), 992–1026 (1992)CrossRefGoogle Scholar
  4. Caplin, A., Leahy, J.: Business as usual, market crashes, and wisdom after the fact. Am. Econ. Rev. 89(3), 548–566 (1994)Google Scholar
  5. Caplin, A., Leahy, J.: Miracle on sixth avenue: information externalities and search. Econ. J. 108(446), 60–74 (1998)CrossRefGoogle Scholar
  6. Caplin, A., Leahy, J.: Mass layoffs and unemployment. J. Monet. Econ. 46(1), 121–142 (2000)CrossRefGoogle Scholar
  7. Chamley, C., Gale, D.: Information revelation and strategic delay in a model of investment. Econometrica 62(5), 1065–1085 (1994)CrossRefGoogle Scholar
  8. Ellison, G., Fudenberg, D.: Rules of thumb for social learning. J. Political Econ. 101(4), 612–643 (1993)CrossRefGoogle Scholar
  9. Ellison, G., Fudenberg, D.: Word-of-mouth communication and social learning. Q. J. Econ. 110(1), 93–125 (1995)CrossRefGoogle Scholar
  10. Engelbrecht-Wiggans, R., Weber, R.J.: A sequential auction involving asymmetrically-informed bidders. Int. J. Game Theory 12(2), 123–127 (1983)CrossRefGoogle Scholar
  11. Gale, D., Kariv, S.: Bayesian learning in social networks. Games Econ. Behav. 45(2), 329–346 (2003)CrossRefGoogle Scholar
  12. Hausch, D.B.: Multi-object auctions: sequential vs simultaneous sales. Manag. Sci. 32(12), 1599–1610 (1986)CrossRefGoogle Scholar
  13. Hendricks, K., Kovenock, D.: Asymmetric information, information externalities, and efficiency: the case of oil exploration. RAND J. Econ. 20(2), 164–182 (1989)CrossRefGoogle Scholar
  14. McFadden, D.L., Train, K.E.: Consumers’ evaluation of new products: learning from self and others. J. Political Econ. 104(4), 683–703 (1996)CrossRefGoogle Scholar
  15. Smith, L., Sorensen, P.: Pathological outcomes of observational learning. Econometrica 68(2), 371–398 (2000)CrossRefGoogle Scholar
  16. Vettas, N.: On the informational role of quantities: durable goods and consumers’ word-of-mouth communication. Int. Econ. Rev. 38(4), 915–944 (1997)CrossRefGoogle Scholar
  17. Zhang, J.: Strategic delay and the onset of investment cascades. RAND J. Econ. 28(1), 188–205 (1997)CrossRefGoogle Scholar

Copyright information

© Society for the Advancement of Economic Theory 2019

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of VirginiaCharlottesvilleUSA

Personalised recommendations