Adaptative Learning Models of Consumer Behaviour (first version)

This paper applies recent advances in the theory of learning to the analysis of consumer behaviour, in the context of a market with a dominant firm and a competitive fringe. Dynamically optimal pricing for the dominant firm is characterised when consumers learn adaptively about the relative quality of the product. A parallel is drawn between search goods and experience goods and between full and partial information in the context of adaptive learning. In the latter case, if consumers fail to take into account that information is only partial, they can be locked in the habit of purchasing inferior goods. Surprinsingly, however, the dominant firm's price is lower in the search good case. The firm has an incentive to offer lower prices to induce consumers to become locked in. Even if consumers adopt learning rule that leads asymptotically to correct quality of experience goods, if consumers' initial estimate of the dominant firm's quality is high (low), the firm has an incentive to charge above (below) the myopic monopoly price in order to slow (speed up) learning.