In this paper, I develop a model of the dynamic pricing of a monopolist while information about its product is diffusing through word of mouth. Individuals who purchase the product engage in word of mouth with their friends. The main result establishes that prices optimally fluctuate over time. A monopolist sets prices over time to balance extracting profits in the short term with increasing information diffusion through word of mouth and thereby the population of potential consumers in the future. The key state variable for determining this tradeoff is the distribution of valuations of the individuals on the edge of the diffusion. This distribution of valuations is determined by the history of prices and changes over time. Our analysis reveals that prices must move up and down infinitely often.
- word of mouth
- dynamic pricing