DYNAMIC MONOPOLIST'S BEHAVIOUR AND CONSUMER LEARNING*

Abstract

ABSTRACTThis paper studies the features and the welfare properties of the equilibrium in a monopoly model with asymmetric information: consumers can only learn the quality of the good through experience. Because of word‐of‐mouth communication, cumulated sales help the process of product diffusion. It is proved that usually the profit‐maximizing price policy entails a low introductory price, that is gradually increased over time. Output decreases over time, so that, in order to accelerate the process of information diffusion, the monopolist is induced to produce more than he would with perfect information. For the same reason, the quality level could also be above its full information level. Thus, consumers might even benefit from their own lack of information, becauses this induces the monopolist to offer a larger output, possibly of a better quality.