DP5003 Dynamic Monopoly Pricing and Herding

Author(s): Subir Bose , Gerhard O Orosel , Marco Ottaviani , Lise Vesterlund

Publication Date: April 2005

Keyword(s): monopoly , public information , social learning , herd behaviour , informational cascade

JEL(s): D83 , L12 , L15

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP5003.asp

This paper studies dynamic pricing by a monopolist selling to buyers who learn from each other’s purchases. The price posted in each period serves to extract rent from the current buyer, as well as to control the amount of information transmitted to future buyers. As information increases future rent extraction, the monopolist has an incentive to subsidize learning by charging a price that results in information revelation. Nonetheless in the long run, the monopolist generally induces herding by either selling to all buyers or exiting the market.