Pricing in the Presence of Strategic Consumers and Social Learning Under Contingent Pricing and Price Guarantee

Abstract

Purchasing new experience products or services often involves significant quality uncertainty for both consumers and firms. Social learning through online reviews helps reduce this uncertainty but exacerbates strategic waiting, as consumers delay purchases to gain more information. This paper examines the impact of social learning on firms’ pricing policies in the presence of strategic consumers under two widely adopted schemes: Contingent pricing and price guarantee. We find that while social learning always benefits the firm, it enables the price guarantee scheme to outperform contingent pricing in terms of profitability for highly patient consumers, which would not be possible without social learning. Notably, social learning drives a range of pricing patterns, even making price skimming optimal under price guarantee for highly patient consumers, as high initial prices combined with markdowns effectively alleviate strategic waiting, enhancing review outcomes and the firm’s profitability. Additionally, social learning always enables the firm to extract greater consumer surplus for impatient consumers under price guarantee. In contrast, social learning under contingent pricing consistently benefits consumers and can achieve win-win outcomes when consumers are moderately patient. Our extensions validate the robustness of these findings under different assumptions, including fully rational consumers and partially forward-looking firms. In particular, a partially forward-looking firm can achieve win-win outcomes with social learning under price guarantee, expanding its practical applicability. This study provides novel insights into the role of social learning in shaping pricing strategies, highlighting its implications for firm profitability and consumer welfare in markets influenced by review dynamics and strategic consumers.

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