Market Experimentation in a Dynamic Differentiated-Goods Duopoly
AbstractWe study the evolution of prices in a symmetric duopoly where firms are uncertain about the degree of product differentiation. Customers sometimes perceive the products as close substitutes, sometimes as highly differentiated. Firms learn about their competitive environment from the quantities sold and a background signal. As the informativeness of the market outcome increases with the price differential, there is scope for active learning. In a setting with linear demand curves, we derive firms' pricing strategies as payoff-symmetric mixed or correlated Markov perfect equilibria of a stochastic differential game where the common posterior belief is the natural state variable. When information has low value, firms 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. This market experimentation is transient, and most likely to be observed when the firms' environment changes sufficiently often, but not too frequently.
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Bibliographic InfoPaper provided by EconWPA in its series Game Theory and Information with number 9810001.
Length: 37 pages
Date of creation: 16 Oct 1998
Date of revision: 20 Aug 1999
Note: Type of Document - Acrobat PDF; prepared on PC; pages: 37 ; figures: included
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Duopoly Experimentation; Bayesian Learning; Stochastic Differential Game; Markov Perfect Equilibrium; Mixed Strategies; Correlated Equilibrium;
Other versions of this item:
- 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.
- Godfrey Keller & Sven Rady, 1999. "Market Experimentation in a Dynamic Differentiated-Goods Duopoly," STICERD - Theoretical Economics Paper Series 369, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-1998-12-09 (All new papers)
- NEP-GTH-1998-12-09 (Game Theory)
- NEP-MIC-1998-12-09 (Microeconomics)
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