Consumer Learning and a Firm’s Dynamic Pricing Strategy

Abstract

In the traditional discrete choice model, we assume that consumers know the product attributes without uncertainty. Learning models extend the discrete choice model by assuming that consumers have incomplete information about product attributes and that they can gradually resolve the uncertainty as they receive more information about the product over time. In the first chapter of this dissertation, I conduct a survey on literature of empirical learning models. I distinguish the learning models into three categories. First, demand side learning models which focuses on the effect of different types of consumer learning on demand. Second, supply side learning models which studies the firm's strategies when it does not have full information of consumer demand. Third, consumer learning and firm's marketing strategies which focuses on the interaction of consumer learning and firm's strategies. Empirical learning models have been proved to be a fruitful area of research activity and consumer learning dynamics have been intensively investigated, but there are two areas for future research --- empirical models that combines consumer learning and firm dynamics and empirical models that feature both consumer learning and firm learning.

The second chapter investigates the impact of social learning on a firm's pricing strategy and consumer adoption of new product. New product introductions are accompanied by quality uncertainty. Relative to traditional advertising, Internet and social media play an increasing role in the social learning process that makes consumers learn the quality of new products. In this paper, I formulate a dynamic structural model of optimal pricing of a new product to heterogeneous consumers in the presence of social learning. I apply this model empirically to analyze the pricing strategy following the introduction of Chobani Greek yogurt, a popular new brand whose market share rapidly increased following its introduction in 2008. Chobani set a relatively high initial price after initial entry that remained fixed over time. However my model predicts an optimal pricing strategy entails a low initial price to accelerate social learning, and gradually raising the price as Chobani's market share increased. By adopting a dynamic pricing strategy, my model predicts that Chobani could have increased its discounted profits by over 20%. Further, if it had adopted a dynamic promotion strategy that offers lower prices to consumers who had not yet purchased Chobani (e.g. via coupons), Chobani's profits could have increased an additional 36%.