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Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly

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  • Keller, R Godfrey
  • Rady, Sven

Abstract

We study the evolution of prices set by duopolists who are uncertain about the perceived degree of product differentiation. Customers sometimes view the products as close substitutes, sometimes as highly differentiated. As the informativeness of the quantities sold increases with the price differential, there is scope for active learning by firms. When information has low value to the firms, they charge the same price as would be set by myopic players, and there is no price dispersion. When firms value information more highly, on the other hand, they actively learn by creating price dispersion. Such price dispersion arises in a cyclical fashion, and is most likely to be observed when the firms' environment changes sufficiently often, but not too frequently. Firms' payoffs are higher when they use correlated pricing strategies. Contrary to what one might expect, such coordination need not hurt consumers, provided they are sufficiently impatient.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2919.

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Date of creation: Aug 2001
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Handle: RePEc:cpr:ceprdp:2919

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Related research

Keywords: bayesian learning; correlated equilibrium; duopoly experimentation; markov perfect equilibrium; stochastic differential game;

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Cited by:
  1. 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.
  2. Cripps, Martin William & Keller, Godfrey & Rady, Sven, 2003. "Strategic Experimentation with Exponential Bandits," CEPR Discussion Papers 3814, C.E.P.R. Discussion Papers.
  3. Ruiz-Aliseda, Francisco, 2009. "Misinformative advertising," IESE Research Papers D/809, IESE Business School.
  4. Peitz, Martin & Rady, Sven & Trepper, Piers, 2013. "Experimentation in Two-Sided Markets," Working Papers 13-03, University of Mannheim, Department of Economics.
  5. Keller, Godfrey & Rady, Sven, 2012. "Breakdowns," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 396, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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