ON THE INFORMATIONAL ROLE OF QUANTITIES - DURABLE GOODS AND CONSUMERSWORD-OF-MOUTH COMMUNICATION

A dynamic incomplete information game is set up to study the introduct ion of a durable good when consumers can learn its quality from previo us buyers. High sales today imply fewer potential buyers tomorrow, but each buyer will have better information about the good. Consumers are fully rational and can update their beliefs even when they do not dir ectly receive information: in equilibrium, no news is bad news. A low- quality firm follows a 'fly-by-night' strategy, randomizing over the t iming of sales. A high-quality firm spreads out its sales more smoothl y, solving a stochastic dynamic programming problem.