On the Informational Role of Quantities: Durable Goods and Consumers' Word- of-Mouth Communication

Abstract

A dynamic incomplete information game is set up to study the introduction of a durable good when consumers can learn its quality from previous buyers. High sales today imply fewer potential buyers tomorrow, but each buyer will have better information about the good. Consumers are fully rational and can update their beliefs, even when they do not directly receive information; in equilibrium, no news is bad news. A low-quality firm follows a 'fly-by-night' strategy, randomizing over the timing of sales. A high-quality firm spreads out its sales more smoothly, solving a stochastic dynamic programming problem. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.