Dynamic pricing in the presence of individual learning

This paper studies price dynamics in a setting in which a monopolist sells a new experience good over time to many buyers, and the seller can neither price discriminate among the buyers nor commit to a price rule. Buyers learn from their own experiences about the effectiveness of the product. Individual learning generates ex post heterogeneity, which affects the buyers’ purchasing decisions, the monopolist’s pricing strategy, and efficiency. When learning occurs through good news signals, buyers receive a rent because of the possible advantageous belief caused by short-lived deviations. If a good news signal arrives, the price can instantaneously increase or decrease depending on the arrival time of this signal. The equilibrium is inefficient because the monopolist’s incentive to exploit known buyers leads to inefficient early termination of exploration. When learning occurs through bad news signals, ex post heterogeneity has no such effect, since only homogeneous unknown buyers purchase the experience good. JEL classification: D83; C02; C61; C73