Incentives through Consumer Learning about Tastes

Heiner Schumacher

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

Abstract

We consider a long-lived firm that faces an infinite sequence of finitely-lived consumers. In each period, the firm can exert either high or low effort, which is the firm's private information. When consumers learn about the firm's talent from the outcomes of previous transactions, there exists no equilibrium in which the firm always exerts high effort. However, when consumers learn about their own tastes, such an equilibrium can exist. Consumer learning about tastes therefore is an alternative to reputational concerns that produces stable incentives. We discuss the implications of this mechanism for advertising, advertising content, and consumer education.
Original languageEnglish
JournalInternational Journal of Industrial Organization
Volume79
Pages (from-to)170-177
Number of pages8
ISSN0167-7187
DOIs
Publication statusPublished - 2014

Keywords

  • Moral hazard
  • Learning
  • Advertising

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