Research
Publications
Learning Quality through Prices and Word-of-Mouth Communication, Journal of Economics and Management Strategy, 27(1), 53-70 (2018).
This paper studies the effect of word-of-mouth communication on the optimal pricing strategy for new experience goods. I consider a dynamic monopoly model with asymmetric information about product quality, in which consumers learn in equilibrium from both prices and other consumers. The main result is that word-of-mouth communication is essential for the existence of separating equilibria, wherein the high-quality monopolist signals high quality through a low introductory price (lower than the monopoly price), and the low-quality one charges the monopoly price. The intuition is simple: low prices are costly, and will only be used by firms confident enough that increased experimentation (and therefore communication among consumers) will yield good news about quality and increased future profits. Additional results are the following: for the high-quality seller, the expected price (quantity) is increasing (decreasing) over time; whereas for the low-quality one, the opposite is true. Moreover, signaling becomes more difficult when consumers pay less attention to their peers' reports and more attention to past prices. Finally, word-of-mouth communication improves consumer welfare.
Signaling quality in the presence of Observational Learning, with Nicolás Figueroa, Review of Industrial Organization, 56, 515-534 (2020)
We study the optimal pricing strategy for a new product in the presence of signaling and observational learning. In our model, a long-lived monopolist faces a representative consumer each period. The monopolist is privately informed about his type, here the probability of producing good-quality products. First-period consumers are early adopters, who learn quality before purchasing the product. Late adopters learn quality from public history, that is firstt-period price and early adopters' purchase decision. Prices then play three roles. Besides generating revenues, they signal the firm's confidence in the technical features of the product, and also determine the amount of information transmitted through early adopters' purchase decisions (observational learning). Our main result is that separation might occur through either high or low prices (with respect to the full-information monopoly price), depending on the elasticity of early adopters' demand. When demand for good-quality products is less elastic, high prices are less costly for high-type firms due to both a static (through demand) and dynamic (through information transmission) effect. On the one hand, high-type firms are marginally less affected by high prices, since they lose fewer consumers. On the other hand, early sales at higher prices carry good news about quality to late adopters, since such sales are more likely to come from a good than from a bad-quality product. The opposite happens when demand for good-quality products is more elastic.
Testing the sender: When signaling is not enough (with Nicolás Figueroa), Journal of Economic Theory, 197, 105348 (2021)
A worker, privately informed about his fit with a firm, chooses an action to signal this information. The firm might perform a test and decides whether to hire the worker. We define firm effectiveness as the difference between the optimal probabilities of hiring a good-fit and a bad-fit worker, and show that it has an inverted U-shape with respect to beliefs. When the worker's expected fit is low, firm effectiveness is increasing in beliefs, and information is revealed through both signaling and information acquisition. Since the high type is more likely to pass a more exacting test, he will exert costly effort to improve firm's beliefs. When, on the other hand, the worker's expected fit is high, firm effectiveness is decreasing in beliefs and any signaling effort made by the high type would be mimicked by the low type, who benefits more from relaxed standards, so that information is generated exclusively by the firm through tests.
Signaling through tests (with Nicolás Figueroa), The Quarterly Review of Economics and Finance, 92, 25-34 (2023)
A firm (sender), privately informed about product quality, chooses a public test. Tests vary in informativeness and return a binary result. The market (receiver) forms interim beliefs based on test informativeness and posteriors based on test results. We show that standard single-crossing does not hold everywhere. A more informative test is less costly to the high type, who fails it less often, while better interim beliefs may benefit either the high or the low type depending on the prior. When a firm’s expected quality is low, an increase in interim beliefs makes the market more sensitive to test results. Then the high type has more incentives to choose a more informative test and separation occurs. When a firm’s expected quality is high, a further increase in interim beliefs makes the market less sensitive to test results. In this case, the unique equilibrium is pooling with both types choosing a test with intermediate level of informativeness.
Working papers
Innovation, Regulation, and Corporate Responsibility, (with Jorge Lemus and Nicolás Figueroa).
Innovators split limited resources between evaluating the potential social harm of a new product and prioritizing development and market entry. Corporate Social Responsibility (CSR) advocates for responsible product development, including assessing potential risks. We analyze the impact of different regulatory regimes on an innovator's investment in CSR when the regulator can acquire additional information about the product's harm after market entry. Higher investment in CSR reduces the probability of successful product development but also may alleviate regulator's need to invest resources to learn about product harm. We show that pure liability or withdrawal regimes result in underinvestment in CSR, while requiring evidence for pre-market approval may lead to overinvestment and harm innovation. However, a combination of liability and withdrawal can achieve the first-best level of investment in CSR under certain conditions. Our results contribute to understanding optimal regulatory design for fostering responsible innovation.
Procuring Drugs while Regulating the Private Market, (with Nicolás Figueroa).
We consider a government agency procuring a good from N firms. Firms are privately informed about their marginal costs. Firms i = 2, ...,N participate only in the procurement. On the other hand, firm i = 1 also sells in a market where it acts as a monopolist. The regulator designs a mechanism that maximizes expected social welfare - the sum of consumer surplus and firms’ profits minus payments - among all mechanisms that satisfies incentive compatibility and voluntary participation. The optimal mechanism shows some peculiar features and it depends on firm 1’s marginal cost. When c1 is sufficiently low, the optimal mechanism is the juxtaposition of a standard procurement auction and a regulatory mechanism. The good is procured from the firm with the lowest virtual cost and the monopoly market is regulated with a price equal to virtual cost. When c1 is sufficiently high, firm 1 is either excluded from the procurement and allowed to charge the monopoly price, or it is forced to charge a price above its monopoly level, and allocated the object with positive probability. The regulator chooses this distortion in order to take advantage of countervailing incentives, which make firm cheaper in terms of informational rents.
Price dynamics with Information Acquisition and Learning, (with Nicolás Figueroa).
We study a market in which the buyer has no information about product quality, while the seller has private probabilistic information about it. Buyers observe price and can procure an inspection, which provides valuable information about the good for sale. With costless inspections, there is no separating equilibrium. We then show that when information acquisition is costly, there is a separating equilibrium that satisfies the intuitive criterion, in which high prices signal high quality and furthermore, the dynamic separating equilibrium showing higher separating prices than the static one. Finally we discuss the implications of time-on-the-market on separating equilibria. Specifically, when there is only one asset on sale over both periods (therefore both price and time-on-the-market can signal quality) there is no separating equilibrium even if single-crossing is satisfied. The key to this result is that the second-period buyer cannot observe why the asset did not sell in the first period. Notably, the failure to sell can be attributed to overpricing or an unfavorable inspection outcome. Therefore the copycat behavior is more attractive to the poor-quality seller because he benefits more from an increase in buyer beliefs than his high-quality counterpart. Allowing only the first-period buyer to acquire information on quality, we show the existence of a separating equilibrium in which high prices and time-on-the-market signal high quality.