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Demand and Supply in New Markets: Diffusion with Bilateral Learning

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  • Nikolaos Vettas

Abstract

I explore the endogenous joint evolution of demand and supply in new markets. Firms and consumers learn, in a Bayesian fashion, by observing the behavior of other firms and consumers, respectively. As a result, endogenous information diffusion takes place on both sides of the market. In equilibrium, entry occurs in waves and its level depends on two distinct informational effects. The model identifies an externality that provides a natural explanation for S-shaped diffusion paths: entry reveals information to the consumers about the value of the new product, and thus early waves of entry affect the expected profitability of subsequent entry.

Suggested Citation

  • Nikolaos Vettas, 1998. "Demand and Supply in New Markets: Diffusion with Bilateral Learning," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 215-233, Spring.
  • Handle: RePEc:rje:randje:v:29:y:1998:i:spring:p:215-233
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    Cited by:

    1. Kosfeld, Michael, 2005. "Rumours and markets," Journal of Mathematical Economics, Elsevier, vol. 41(6), pages 646-664, September.
    2. Geroski, P. A., 2000. "Models of technology diffusion," Research Policy, Elsevier, vol. 29(4-5), pages 603-625, April.
    3. Rigotti, L. & Ryan, M. & Vaithianathan, R., 2001. "Entrepreneurial Innovation," Discussion Paper 2001-21, Tilburg University, Center for Economic Research.
    4. J. Miguel Villas-Boas, 2000. "Competing with Experience Goods," Econometric Society World Congress 2000 Contributed Papers 0771, Econometric Society.
    5. Óscar Gutiérrez & Francisco Ruiz-Aliseda, 2009. "Entry Patterns Over The Product Life Cycle," Manchester School, University of Manchester, vol. 77(5), pages 594-610, September.
    6. Rixen, Martin & Weigand, Jürgen, 2014. "Agent-based simulation of policy induced diffusion of smart meters," Technological Forecasting and Social Change, Elsevier, vol. 85(C), pages 153-167.
    7. Rafael Rob & Nikolaos Vettas, 2003. "Foreign Direct Investment and Exports with Growing Demand," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 629-648.
    8. Roe, Brian E. & Teisl, Mario F., 2004. "Consumption Externalities, Information Policies, And Multiple Equilibria: Evidence For Genetically Engineered Food Markets," 2004 Annual meeting, August 1-4, Denver, CO 20243, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    9. Hiroshi Kitamura, 2010. "Capacity Expansion In Markets With Inter-Temporal Consumption Externalities," Australian Economic Papers, Wiley Blackwell, vol. 49(2), pages 127-148, June.
    10. Navarro, Noemí, 2012. "Price and quality decisions under network effects," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 263-270.
    11. Kotseva, Rossitsa & Vettas, Nikolaos, 2005. "Foreign Direct Investment and Exports Dynamics with Demand Learning," CEPR Discussion Papers 5262, C.E.P.R. Discussion Papers.
    12. Chia-Hui Chen & Junichiro Ishida, 2017. "A War of Attrition with Experimenting Players," ISER Discussion Paper 1014, Institute of Social and Economic Research, Osaka University.
    13. Henk Folmer & Auke Leen, 2013. "Why do successful restaurants not raise their prices?," Letters in Spatial and Resource Sciences, Springer, vol. 6(2), pages 81-90, July.
    14. Kitamura, Hiroshi & Miyaoka, Akira & Sato, Misato, 2013. "Free entry, market diffusion, and social inefficiency with endogenously growing demand," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 98-116.

    More about this item

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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