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

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