Two-period pricing strategies in the presence of social learning and herding effect

This study examines a pricing model spanning two periods, which incorporates social learning and herding effect, while acknowledging the potential for quality uncertainty to diminish consumers' willingness to pay for a product. The analysis focuses on a monopolistic firm that offers a new experience product over two selling periods, and evaluates the efficacy of price commitment versus dynamic pricing strategies in maximizing profit. The findings indicate that the optimal pricing strategy is contingent upon the interplay of social learning, herding effect, and the degree of consumer uncertainty regarding product quality. Our study reveals that positive social learning can be advantageous for firms. However, contrary to conventional wisdom, negative social learning does not necessarily have a detrimental impact on firms. This is due to the combined effects of the markdown loss and demand uplift. Additionally, our findings indicate that the herding effect can be beneficial for firms that adopt a price commitment strategy, but this may not always hold true for those who opt for dynamic pricing strategy. Our research offers valuable managerial insights for firms seeking to effectively manage the social learning and herding effect in their pricing strategies.