Advanced Search
MyIDEAS: Login

Market Experimentation and Pricing

Contents:

Author Info

Abstract

We present a continuous-time model of Bayesian learning in a duopolistic market. Initially the value of one product offered is unknown to the market. The market participants learn more about the true value of the product as experimentation occurs over time. Firms set prices to induce experimentation with their product. The aggregate outcomes are public information. As agents learn from the experiments of others, informational externalities arise. Surprisingly, the informational externality leads to too much learning. Buyers do not consider the impact of their experimentation on other buyers while the sellers internalize the gains from experiments conducted by the buyers. The firms free ride on the market as the social costs of experiments are not appropriately reflected in the equilibrium prices. The value functions of the sellers display preference for information in contrast to the buyers who are information averse. We determine Markov Perfect Equilibrium prices and allocations in this two-sided learning model. The analysis is presented for a finite number of buyers as well as for a continuum of buyers. The severity of the inefficiency is shown to be monotonically increasing in the number of buyers.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://cowles.econ.yale.edu/P/cd/d11a/d1122.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1122.

as in new window
Length: 39 pages
Date of creation: Apr 1996
Date of revision:
Handle: RePEc:cwl:cwldpp:1122

Contact details of provider:
Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/
More information through EDIRC

Order Information:
Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

Related research

Keywords: Learning; experimentation; dynamic oligopoly; markov perfect equilibrium;

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  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. Chamley, Christophe & Gale, Douglas, 1994. "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, Econometric Society, vol. 62(5), pages 1065-85, September.
  3. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
  4. Aghion, P. & Espinoza, M.P. & Jullien, B., 1990. "Dynamic Duopoly With Learning Through Market Experimentation," DELTA Working Papers 90-13, DELTA (Ecole normale supérieure).
  5. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
  6. Dirk Bergemann & Juuso Valimaki, 1997. "Market Diffusion with Two-Sided Learning," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 773-795, Winter.
  7. Bertola, Giuseppe & Felli, Leonardo, 1993. "Job matching and the distribution of producer surplus," Ricerche Economiche, Elsevier, vol. 47(1), pages 65-92, March.
  8. Joseph Farrell & Garth Saloner, 1984. "Standardization, Compatibility and Innovation," Working papers 345, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
  10. Bergemann, Dirk & Valimaki, Juuso, 1996. "Learning and Strategic Pricing," Econometrica, Econometric Society, vol. 64(5), pages 1125-49, September.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Godfrey Keller & Sven Rady, 1999. "Market experimentation in a dynamic differentiated-goods duopoly," LSE Research Online Documents on Economics 19346, London School of Economics and Political Science, LSE Library.
  2. Carole Haritchabalet, . "Strategic Experimentation In A Durable Goods Duopoly," UFAE and IAE Working Papers 433.99, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  3. Dirk Bergemann & Juuso Valimaki, 1997. "Market Diffusion with Two-Sided Learning," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 773-795, Winter.
  4. Moscarini, Giuseppe & Ottaviani, Marco, 2001. "Price Competition for an Informed Buyer," Journal of Economic Theory, Elsevier, vol. 101(2), pages 457-493, December.
  5. Marco Ottaviani, . "Monopoly Pricing with Social Learning," ELSE working papers 035, ESRC Centre on Economics Learning and Social Evolution.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:1122. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Glena Ames).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.