Dynamic Pricing in the Presence of Social Learning∗

This paper studies how the interplay of individual and social learning affects price dynamics. I consider a monopolist selling a new experience good over time to many buyers. Buyers learn from their own private experiences (individual learning) as well as by observing other buyers’ experiences (social learning). Individual learning generates ex post heterogeneity, which affects the buyers’ purchasing decisions and the firm’s pricing strategy. When learning is through good news signals, the monopolist’s incentive to exploit the known buyers causes experimentation to be terminated too early. After the arrival of a good news signal, the price could instantaneously go down in order to induce the remaining unknown buyer to experiment. When learning is through bad news signals, experimentation is efficient, since only the homogeneous unknown buyers purchase the experience good.