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Just Starting Out: Learning and Equilibrium in a New Market

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Listed:
  • Ulrich Doraszelski
  • Gregory Lewis
  • Ariel Pakes

Abstract

We document the evolution of the new market for frequency response within the UK electricity system over a six-year period. Firms competed in price while facing considerable initial uncertainty about demand and rival behavior. We show that prices stabilized over time, converging to a rest point that is consistent with equilibrium play. We draw on models of fictitious play and adaptive learning to analyze how this convergence occurs and show that these models predict behavior better than an equilibrium model prior to convergence.

Suggested Citation

  • Ulrich Doraszelski & Gregory Lewis & Ariel Pakes, 2018. "Just Starting Out: Learning and Equilibrium in a New Market," American Economic Review, American Economic Association, vol. 108(3), pages 565-615, March.
    • Handle: RePEc:aea:aecrev:v:108:y:2018:i:3:p:565-615
    Note: DOI: 10.1257/aer.20160177
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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

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