Consumer Learning and Optimal Pricing Strategies for Products of Unknown Quality

Abstract

Economic agents frequently make decisions without complete information about the relevant variables (see Hirshleifer and Riley [1979]). In particular, consumers are typically uncertain about the quality of products with which they are unfamiliar and thus make decisions without complete information about the relevant variables. Recent research (Cremer [1984], Goering [1985a, 1985b], Grossman, Kihlstrom and Mirman [1977], Shapiro [1583], and Smallwood and Conlisk [1979]) has examined the effect of incomplete information and consumer learning about product quality through product usage on the optimal decision making of consumers and firms. This chapter will suggest a model of consumer purchasing decision making with incomplete information about product quality and learning through personal experience. The implications of this model of consumer behavior on product demand and on the pricing decisions of firms will then be explored.