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Consumer Learning and Firm Dynamics

Author

Listed:
  • Zachary Mahone
  • Filippo Rebessi
Abstract
We propose a general equilibrium model of industry where consumers learn about firms' unobserved product quality over time. Because consumers learn through purchase decisions, price setting is a crucial lever through which firms manipulate future demand. We map equilibrium policies to a range of empirical evidence on industry, firm, product and price dynamics. We then study how firms respond as consumer information varies. Specifically, we show that firms exacerbate information problems by constraining learning more aggressively in those markets where consumers are less informed. Developing an indicator of consumer information by product category, we find these are typically markets for consumer durables. Finally, the efficiency implications of this behavior and interaction with size-dependent policies are explored.

Suggested Citation

  • Zachary Mahone & Filippo Rebessi, 2019. "Consumer Learning and Firm Dynamics," Department of Economics Working Papers 2019-08, McMaster University.
    • Handle: RePEc:mcm:deptwp:2019-08
    as

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    File URL: http://socialsciences.mcmaster.ca/econ/rsrch/papers/archive/2019-08.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Learning; Firm Dynamics; Product Quality; Welfare;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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