Learning and Strategic Pricing
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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Volume (Year): 64 (1996)
Issue (Month): 5 (September)
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References listed on IDEAS
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- Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
- Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 655-75, July.
- Bergemann, Dirk & Valimaki, Juuso, 1996.
"Learning and Strategic Pricing,"
Econometric Society, vol. 64(5), pages 1125-49, September.
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