Price Experimentation with Strategic Buyers

There are many situations in which buyers have a significant stake in what a firm learns about their demands. Specifically, any time that price discrimination is possible on an individual basis and repeat purchases are likely, buyers possess incentives for strategic manipulation of demand information. A simple two-period model in which a monopolist endeavors to learn about the demand parameter of a repeat buyer is presented here. It is shown that high first-period prices may lead to strategic rejections by high-valuation buyers who wish to conceal information (i.e., to pool), while low first-period prices may lead to strategic rejections by low-valuation buyers who wish to reveal information (i.e., to signal). The seller never experiments against patient buyers in any equilibrium. Indeed, the seller often charges first-period prices that reveal no information at all, and she may even set an equilibrium first-period price strictly below the buyer's lowest possible valuation.