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Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly

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  • Keller, Godfrey
  • Rady, Sven

Abstract

We study price-setting duopolists who are uncertain about the degree to which their products are perceived as differentiated. Customers' sensitivity to price differences varies over time and must be estimated from the quantities sold. The information content of these quantities increases with the price difference, so there is scope for active learning. In equilibrium, price dispersion arises in a cyclical fashion, and is most likely to be observed when customers' sensitivity to price differences is moderately variable over time. The duopolists can increase profits by using correlated pricing strategies. Such coordination need not hurt consumers, provided they are sufficiently impatient. Copyright 2003 by the RAND Corporation.

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Bibliographic Info

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

Volume (Year): 34 (2003)
Issue (Month): 1 (Spring)
Pages: 138-65

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Handle: RePEc:rje:randje:v:34:y:2003:i:1:p:138-65

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Cited by:
  1. Keller, Godfrey & Rady, Sven, 0. "Breakdowns," Theoretical Economics, Econometric Society.
  2. Godfrey Keller & Martin Cripps, 2003. "Strategic Experimentation with Exponential Bandits," Economics Series Working Papers 143, University of Oxford, Department of Economics.
  3. Peitz, Martin & Rady, Sven & Trepper, Piers, 2011. "Experimentation in Two-Sided Markets," CEPR Discussion Papers 8670, C.E.P.R. Discussion Papers.
  4. Ruiz-Aliseda, Francisco, 2009. "Misinformative advertising," IESE Research Papers D/809, IESE Business School.
  5. Dirk Bergemann & Juuso Valimaki, 2004. "Monopoly Pricing of Experience Goods," Cowles Foundation Discussion Papers 1463R, Cowles Foundation for Research in Economics, Yale University, revised May 2005.

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