On the Informational Role of Quantitites: Durable Goods and Consumers' Word-of-Mouth Communication

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Abstract
A dynamic incomplete information game is set up to study the introduction of a durable good when consumers can learn the quality of the good from previous buyers. High sales today imply fewer potential buyers tomorrow but each of them with better information about the good. Consumers also update their beliefs when they do not directly receive information: in equilibrium, no news is bad news. The quantities supplied by a high quality firm are the closed form solution of a stochastic dynamic programming problem. A low quality firm follows a "fly-by-night" strategy, randomizing between selling in different periods.
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