Social learning and delay in a dynamic model of price competition

Abstract

This paper studies dynamic price competition between two firms selling differentiated durable goods to two buyers whose valuations of the two goods depend on their own private type as well as that of the other buyer. We derive a key intertemporal property of the equilibrium prices and construct an equilibrium based on this property. We show that social learning reduces the equilibrium prices in the sense that when the buyers are more interdependent and hence have a stronger incentive to wait and see, the firms respond by lowering their period 1 prices. Interestingly, we find that this response by the firms along with the intertemporal property of the equilibrium prices implies that buyers delay their decisions less often when they become more interdependent.