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Market Diffusion with Two-Sided Learning

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  • Dirk Bergemann
  • Juuso Valimaki

Abstract

We analyze the diffusion of a new product of uncertain value in a duopolistic market. Both sides of the market, buyers and sellers, learn the true value of the new product from experiments with it. Buyers have heterogeneous preferences over the products and sellers compete in prices. The pricing policies and market shares in the unique Markov-perfect equilibrium are obtained explicitly. The dynamics of the equilibrium market shares display excessive sales of the new product relative to the social optimum in early stages and too-low sales later on. The diffusion path of a successful product is S-shaped.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 28 (1997)
Issue (Month): 4 (Winter)
Pages: 773-795

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Handle: RePEc:rje:randje:v:28:y:1997:i:winter:p:773-795

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  1. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 655-75, July.
  2. Ramon Caminal & Xavier Vives, 1996. "Why Market Shares Matter: An Information-Based Theory," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 221-239, Summer.
  3. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  4. Dutta, P.K., 1991. "What Do Discounted Optima Converge To? A Theory of Discount Rate Asymptotics in Economic Models," RCER Working Papers 264, University of Rochester - Center for Economic Research (RCER).
  5. Dirk Bergemann & Juuso Valimaki, 1996. "Market Experimentation and Pricing," Cowles Foundation Discussion Papers 1122, Cowles Foundation for Research in Economics, Yale University.
  6. Harrington Jr. , Joseph E., 1995. "Experimentation and Learning in a Differentiated-Products Duopoly," Journal of Economic Theory, Elsevier, vol. 66(1), pages 275-288, June.
  7. Gort, Michael & Klepper, Steven, 1982. "Time Paths in the Diffusion of Product Innovations," Economic Journal, Royal Economic Society, vol. 92(367), pages 630-53, September.
  8. Aghion, P. & Espinoza, M.P. & Jullien, B., 1990. "Dynamic Duopoly With Learning Through Market Experimentation," DELTA Working Papers 90-13, DELTA (Ecole normale supérieure).
  9. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
  10. Judd, Kenneth L & Riordan, Michael H, 1994. "Price and Quality in a New Product Monopoly," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 773-89, October.
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