Strategic Firms and Endogenous Consumer Emulation

28 Pages Posted: 1 Feb 2008

See all articles by Philipp Kircher

Philipp Kircher

University of Pennsylvania - Department of Economics; IZA Institute of Labor Economics

Andrew Postlewaite

University of Pennsylvania - Department of Economics

Date Written: January 2008

Abstract

Better informed consumers may be treated preferentially by firms since their consumption serves as a quality signal for other customers. For normal goods this results in wealthy individuals being treated better than poor individuals. We investigate this phenomenon in an equilibrium model of social learning with heterogeneous consumers and firms that act strategically. Consumers search for high quality firms and condition their choices on observed actions of other consumers. When they observe consumers who are more likely to have identified a high quality firm, uninformed individuals will optimally emulate those consumers. One group of consumers arises endogenously as "leaders" whose consumption behavior is emulated. Follow-on sales induce firms to give preferential treatment to these lead consumers, which reinforces their learning.

Keywords: Search, social learning, consumption signalling

JEL Classification: L15, D83

Suggested Citation

Kircher, Philipp and Postlewaite, Andrew, Strategic Firms and Endogenous Consumer Emulation (January 2008). PIER Working Paper No. 08-003, Available at SSRN: https://ssrn.com/abstract=1089432 or http://dx.doi.org/10.2139/ssrn.1089432

Philipp Kircher

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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IZA Institute of Labor Economics

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Andrew Postlewaite (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7350 (Phone)
215-573-2057 (Fax)

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