On the consumer problem under an informational externality
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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.
KeywordsInformational externality Social learning Bayesian updating
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