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Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly

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  • Keller, 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 University of Munich, Department of Economics in its series Discussion Papers in Economics with number 21.

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Date of creation: Apr 2001
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Handle: RePEc:lmu:muenec:21

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Related research

Keywords: Duopoly Experimentation ; Bayesian Learning ; Stochastic Differential Game ; Markov Perfect Equilibrium ; Mixed Strategies ; Correlated Equilibrium;

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Cited by:
  1. Godfrey Keller & Sven Rady, 2013. "Breakdowns," Levine's Working Paper Archive 786969000000000635, David K. Levine.
  2. 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.
  3. Peitz, Martin & Rady, Sven & Trepper, Piers, 2011. "Experimentation in Two-Sided Markets," CEPR Discussion Papers 8670, C.E.P.R. Discussion Papers.
  4. Godfrey Keller & Sven Rady & Martin Cripps, 2005. "Strategic Experimentation with Exponential Bandits," Econometrica, Econometric Society, vol. 73(1), pages 39-68, 01.
  5. Ruiz-Aliseda, Francisco, 2009. "Misinformative advertising," IESE Research Papers D/809, IESE Business School.

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