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Learning and Strategic Pricing

  • Bergemann, Dirk
  • Valimaki, Juuso

The authors consider a single consumer buying a stream of goods from different sellers over time. The true value of each seller's product is initially unknown. Additional information is obtained by experimentation. For exogenous prices, this is a multiarmed bandit problem. The innovation here is to endogenize the cost of experimentation by allowing for price competition between the sellers. Prices determine the intertemporal costs and benefits of learning for buyer and sellers. All Markov perfect equilibria are efficient. Prices below marginal cost sustain experimentation. Intertemporal exchange of the gains of learning is necessary to support efficient experimentation. Copyright 1996 by The Econometric Society.

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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 64 (1996)
Issue (Month): 5 (September)
Pages: 1125-49

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Handle: RePEc:ecm:emetrp:v:64:y:1996:i:5:p:1125-49
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  1. Banks, J.s. & Sunderam, R.K., 1991. "Denumerable-Armed Bandits," RCER Working Papers 277, University of Rochester - Center for Economic Research (RCER).
  2. Bergemann, Dirk & Valimaki, Juuso, 1996. "Learning and Strategic Pricing," Econometrica, Econometric Society, vol. 64(5), pages 1125-49, September.
  3. Miller, Robert A, 1984. "Job Matching and Occupational Choice," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 1086-120, December.
  4. Aghion, Philippe, et al, 1991. "Optimal Learning by Experimentation," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 621-54, July.
  5. Aghion Philippe & Bolton, Patrick & Harris Christopher & Jullien Bruno, 1991. "Optimal learning by experimentation," CEPREMAP Working Papers (Couverture Orange) 9104, CEPREMAP.
  6. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  7. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
  8. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 655-75, July.
  9. Bertola, Giuseppe & Felli, Leonardo, 1993. "Job matching and the distribution of producer surplus," Ricerche Economiche, Elsevier, vol. 47(1), pages 65-92, March.
  10. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
  11. McLennan, Andrew, 1984. "Price dispersion and incomplete learning in the long run," Journal of Economic Dynamics and Control, Elsevier, vol. 7(3), pages 331-347, September.
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