Strategic Firms and Endogenous Consumer Emulation

Better informed consumers may be treated preferentially by firms since their consumption serves as a quality signal for other customers. For normal goods this results in wealthy individuals being treated better than poor individuals. We investigate this phenomenon in an equilibrium model of social learning with heterogeneous consumers and firms that act strategically. Consumers search for high quality firms and condition their choices on observed actions of other consumers. When they observe consumers who are more likely to have identified a high quality firm, uninformed individuals will optimally emulate those consumers. One group of consumers arises endogenously as “leaders” whose consumption behavior is emulated. Follow-on sales induce firms to give preferential treatment to these lead consumers, which reinforces their learning.