Dynamic Pricing in the Presence of Social Learning and Strategic Consumers

When a product of uncertain quality is first introduced to market, consumers may strategically delay their purchasing decisions in anticipation of the product reviews of their peers -- this paper extends the strategic consumer paradigm to incorporate this added dimension of consumer behaviour. We consider a model which captures the simplest of interactions between a monopolist firm and forward-looking consumers: the firm makes pricing decisions to maximize its profit over two periods, while consumers make adoption decisions to maximize their expected utility. We first analyse a benchmark model in which consumers are assumed to be forward-looking but do not interact socially. We then embed social learning (SL) in this model, and highlight a series of significant implications for consumer behaviour and firm policy. When the firm commits to a price path ex-ante (pre-announced pricing), social interactions render consumers relatively \more strategic", but at the same time generate an increase in the firm's expected profit. Interestingly, while the firm adopts a price-skimming strategy in the absence of SL, we observe that the firm will generally announce an increasing price plan in the presence of SL. When the firm does not commit to a price path (responsive pricing), social interactions have no effect on strategic consumer behaviour, nevertheless the firm still benefits from the presence of SL. We find that prices in this case may either rise or decline over time, with the latter being ex-ante more likely. Finally, we consider the issue of choosing the optimal class of policy (i.e., pre-announced vs. responsive pricing). Here, we observe that, contrary to the benchmark model and results reported in existing literature on strategic consumer behaviour, price-commitment is generally not beneficial for the _rm when SL is accounted for; through numerical experiments we provide the conditions under which either class of policy is preferred.