Ramon Caminal and Xavier Vives

Price Dynamics and Consumer Learning

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.