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Price Dynamics and Consumer Learning
Author(s) -
Caminal Ramon,
Vives Xavier
Publication year - 1999
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.1999.00095.x
Subject(s) - duopoly , incentive , economics , microeconomics , product (mathematics) , dynamics (music) , quality (philosophy) , dynamic pricing , differential (mechanical device) , psychology , cournot competition , pedagogy , philosophy , geometry , mathematics , epistemology , engineering , aerospace engineering
This paper studies the price dynamics induced by strategic firm behavior in the presence of consumer learning about the uncertain quality differential of the products offered by a duopoly. It is found that consumers learn slowly and that prices converge also slowly to full‐information levels. A consequence is that the incentives affirms to manipulate consumers' beliefs are persistent. Although pricing tends to be aggressive at the early stages, and average prices eventually increase over time, price wars may occur at intermediate stages of the product life cycle.