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Adaptive Learning Models of Consumer Behaviour

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  • Ed Hopkins

Abstract

This paper applies recent advances in the theory of learning to the analysis of consumer behaviour in a dynamic duopoly. Nash equilibrium play is characterised when consumers learn adaptively about the relative quality of the two products. A constrast is made between belief-based and reinforcement/familiarity-based learning. In the latter case, consumers can be locked in the habit of purchasing inferior goods. Such lock-in permits the existence of multiple history-dependent asymmetric steady states in which one firm dominates. In contrast, belief-based learning rules must lead asymptotically to correct beliefs about the quality of the two brands and so in this case there is a unique steady state. However, if consumers' initial estimate of a firm's quality is high (low), a firm has an incentive to charge above (below) the myopic duopoly price in order to slow (speed up) learning.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 506439000000000346.

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Date of creation: 11 Dec 2010
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Handle: RePEc:cla:levarc:506439000000000346

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Cited by:
  1. Alos-Ferrer, Carlos & Kirchsteiger, Georg & Walzl, Markus, 2006. "On the Evolution of Market Institutions: The Platform Design Paradox," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5538, C.E.P.R. Discussion Papers.
  2. Friederike Mengel, 2007. "Learning Across Games," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 2007-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  3. Grimm, Veronika & Mengel, Friederike, 2012. "An experiment on learning in a multiple games environment," Journal of Economic Theory, Elsevier, Elsevier, vol. 147(6), pages 2220-2259.
  4. Oyarzun, Carlos & Sarin, Rajiv, 2013. "Learning and risk aversion," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(1), pages 196-225.
  5. Carlos Oyarzun & Rajiv Sarin, 2012. "Learning and Risk Aversion," Levine's Working Paper Archive 786969000000000572, David K. Levine.
  6. Liangjie Zhao & Wenqi Duan, 2014. "Simulating the Evolution of Market Shares: The Effects of Customer Learning and Local Network Externalities," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 43(1), pages 53-70, January.

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