Market Diffusion with Two-Sided Learning
AbstractThe diffusion of a new product of uncertain value is analyzed in a duopolistic market in continuous time. The two sides of the market, buyers and sellers, learn the true value of the new product over time as a result of experimentation. Buyers have heterogeneous preferences over the products and sellers compete in prices. The pricing policies and market shares of the sellers in the unique Markov perfect equilibrium are obtained explicitly. The dynamics of the equilibrium market shares display excessive sales of the new product relative to the social optimum in early stages and too low sales later on. The dynamic resolution of uncertainty implies ex post differentiation and hence both sellers value information positively. As information is generated only by experiments with the new product, this relaxes the price competition in the dynamic setting. Finally, the diffusion path of a successful product is shown to be S-shaped.
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Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1138.
Length: 43 pages
Date of creation: Nov 1996
Date of revision:
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
Other versions of this item:
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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- Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 655-75, July.
- Aghion, P. & Espinoza, M.P. & Jullien, B., 1990.
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DELTA Working Papers
90-13, DELTA (Ecole normale supérieure).
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- Jullien Bruno & Aghion Philippe & Paz Espinoza M, 1990. "Dynamic duopoly with learning through market experimentation," CEPREMAP Working Papers (Couverture Orange) 9012, CEPREMAP.
- Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
- Dirk Bergemann & Juuso Valimaki, 1996. "Market Experimentation and Pricing," Cowles Foundation Discussion Papers 1122, Cowles Foundation for Research in Economics, Yale University.
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