Sales Disclosure and Pricing Policies in the Presence of Social Learning

Abstract

This study analyzes the role of sales disclosure and social learning (SL) in firms’ optimal responsive pricing policies and profits. If sales quantities are disclosed, potential customers will increase (decrease) their willingness to pay for the product based on the observation of relatively high (low) sales. In a monopoly market, a firm can control initial sales through the initial price, thus influencing consumers’ SL outcomes. We find that disclosing sales quantities and enhancing SL are always beneficial for a firm in a monopoly context. With an increase in the intensity of SL, a monopoly firm has a higher incentive to decrease the initial price of a product to attract early buyers, which is beneficial for consumers. However, consumer surplus may decrease if consumers’ purchase intentions are strongly driven by historical sales quantities. In a duopoly market, learning based on historical sales quantities can encourage potential customers but intensify competition between firms. Thus, in a competitive market, sales disclosure and SL are only beneficial to firms when consumers’ intrinsic valuation of a product is relatively low. Otherwise, SL harms firms.