## Abstract

This paper studies observational learning in a consumer search environment.

In our model, consumers observe the purchasing decision of a predecessor

before deciding which firm to visit. We show that if consumers emulate

their predecessor and initiate their search at the firm she purchased from, a

social multiplier of demand induces a lower equilibrium price. Further, as the

search cost increases, firms compete fiercely to attract consumers and prices

converge to the marginal cost. We show that the result can be extended to any

number of firms, and the effect of emulation on prices is stronger as the number

of firms increases. We also show that, as consumers observe more previous

purchasing decisions, the downward pressure on prices grows to the degree

that the pure strategy equilibrium may cease to exist. We then provide a rationale

for emulation by introducing positive correlation in preferences across

consumers. This correlation gives rise to free-riding which deters search, and

as a result puts further downward pressure on prices for high search cost.

In our model, consumers observe the purchasing decision of a predecessor

before deciding which firm to visit. We show that if consumers emulate

their predecessor and initiate their search at the firm she purchased from, a

social multiplier of demand induces a lower equilibrium price. Further, as the

search cost increases, firms compete fiercely to attract consumers and prices

converge to the marginal cost. We show that the result can be extended to any

number of firms, and the effect of emulation on prices is stronger as the number

of firms increases. We also show that, as consumers observe more previous

purchasing decisions, the downward pressure on prices grows to the degree

that the pure strategy equilibrium may cease to exist. We then provide a rationale

for emulation by introducing positive correlation in preferences across

consumers. This correlation gives rise to free-riding which deters search, and

as a result puts further downward pressure on prices for high search cost.

Original language | English |
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Number of pages | 45 |

Publication status | Published - Jan 2015 |

### Publication series

Series | Vienna Economics Papers |
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Number | No. 1502 |

## Austrian Fields of Science 2012

- 502047 Economic theory

## Keywords

- Consumer Search, Observational Learning, Emulation