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Experimentation in Markets

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Author Info
Dirk Bergemann
Juuso Valimaki

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Abstract

We present a model of entry and exit with Bayesian learning and price competition. The value of the new product is initially unknown in the market, but purchases of the product yield information on its true value. We assume that the performance of the new product is publicly observable. As agents learn from the experiments of others, informational externalities arise. We determine the Markov Perfect Equilibrium prices and allocations in different market structures. In a single market, the informational externality among the buyers leads to too much learning. If the entry of the new product occurs in many distinct markets, then efficiency is reestablished in the limit as the number of markets grows. We finally analyze entry into different market segments and show that the new firm starts by selling to the informationally inexpensive buyers.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1220.

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Date of creation: Apr 1996
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Handle: RePEc:nwu:cmsems:1220

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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.:
  1. 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. [Downloadable!] (restricted)
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  2. McFadden, Daniel L & Train, Kenneth E, 1996. "Consumers' Evaluation of New Products: Learning from Self and Others," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 683-703, August. [Downloadable!] (restricted)
  3. Kenneth Hendricks & Dan Kovenock, 1989. "Asymmetric Information, Information Externalities, and Efficiency: The Case of Oil Exploration," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 164-182, Summer. [Downloadable!] (restricted)
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  4. Bergemann, Dirk & Valimaki, Juuso, 2000. "Experimentation in Markets," Review of Economic Studies, Blackwell Publishing, vol. 67(2), pages 213-34, April.
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  5. Keller, Godfrey & Rady, Sven, 1999. "Optimal Experimentation in a Changing Environment," Review of Economic Studies, Blackwell Publishing, vol. 66(3), pages 475-507, July. [Downloadable!] (restricted)
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  6. Banerjee, Abhijit & Fudenberg, Drew, 2004. "Word-of-mouth learning," Games and Economic Behavior, Elsevier, vol. 46(1), pages 1-22, January. [Downloadable!] (restricted)
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  7. Felli, Leonardo & Harris, Christopher, 1996. "Learning, Wage Dynamics, and Firm-Specific Human Capital," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 838-68, August. [Downloadable!] (restricted)
  8. Dirk Bergemann & Juuso Valimaki, 1996. "Market Diffusion with Two-Sided Learning," Cowles Foundation Discussion Papers 1138, Cowles Foundation, Yale University. [Downloadable!]
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  9. Bergemann, Dirk & Valimaki, Juuso, 1996. "Learning and Strategic Pricing," Econometrica, Econometric Society, vol. 64(5), pages 1125-49, September. [Downloadable!] (restricted)
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  10. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October. [Downloadable!] (restricted)
  11. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Blackwell Publishing, vol. 58(4), pages 655-75, July. [Downloadable!] (restricted)
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(explanations, 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.)

  1. Décamps, Jean-Paul & Mariotti, Thomas & Villeneuve, Stéphane, 2000. "Investment Timing under Incomplete Information," IDEI Working Papers 115, Institut d'Économie Industrielle (IDEI), Toulouse, revised Apr 2004. [Downloadable!]
  2. Subir Bose & Gerhard O. Orosel & Lise Vesterlund, 2001. "Optimal Pricing and Endogenous Herding," Vienna Economics Papers 0204, University of Vienna, Department of Economics. [Downloadable!]
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  3. Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2004. "Timing Games with Informational Externalities," Levine's Working Paper Archive 122247000000000704, David K. Levine. [Downloadable!]
  4. Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2004. "Social Learning in One-Arm Bandit Problems," Discussion Papers 1396, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  5. Dirk Bergemann & Juuso Valimaki, 1999. "Experimentation in Markets," Cowles Foundation Discussion Papers 1214, Cowles Foundation, Yale University. [Downloadable!]
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  6. Philipp Kircher & Andrew Postlewaite, 2008. "Strategic Firms and Endogenous Consumer Emulation," PIER Working Paper Archive 08-003, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
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  7. Biglaiser, Gary & Vettas, Nikolaos, 2004. "Dynamic Price Competition with Capacity Constraints and Strategic Buyers," CEPR Discussion Papers 4315, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Kichool Park, 2001. "Essays in Strategic Experimentation," Levine's Working Paper Archive 625018000000000131, David K. Levine. [Downloadable!]
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