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Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly

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  • Keller, Godfrey
  • Rady, Sven

Abstract

We study price-setting duopolists who are uncertain about the degree to which their products are perceived as differentiated. Customers' sensitivity to price differences varies over time and must be estimated from the quantities sold. The information content of these quantities increases with the price difference, so there is scope for active learning. In equilibrium, price dispersion arises in a cyclical fashion, and is most likely to be observed when customers' sensitivity to price differences is moderately variable over time. The duopolists can increase profits by using correlated pricing strategies. Such coordination need not hurt consumers, provided they are sufficiently impatient. Copyright 2003 by the RAND Corporation.

Suggested Citation

  • Keller, Godfrey & Rady, Sven, 2003. " Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 138-165, Spring.
  • Handle: RePEc:rje:randje:v:34:y:2003:i:1:p:138-65
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    Cited by:

    1. Bonatti, Alessandro & Hörner, Johannes, 2017. "Learning to disagree in a game of experimentation," Journal of Economic Theory, Elsevier, vol. 169(C), pages 234-269.
    2. Ruiz-Aliseda, Francisco, 2009. "Misinformative advertising," IESE Research Papers D/809, IESE Business School.
    3. Martin Peitz & Sven Rady & Piers Trepper, 2017. "Experimentation in Two-Sided Markets," Journal of the European Economic Association, European Economic Association, vol. 15(1), pages 128-172.
    4. Godfrey Keller & Sven Rady & Martin Cripps, 2005. "Strategic Experimentation with Exponential Bandits," Econometrica, Econometric Society, vol. 73(1), pages 39-68, January.
    5. Godfrey Keller & Martin Cripps, 2003. "Strategic Experimentation with Exponential Bandits," Economics Series Working Papers 143, University of Oxford, Department of Economics.
    6. Suvi Vasama, 2016. "Unraveling of Cooperation in Dynamic Collaboration," SFB 649 Discussion Papers SFB649DP2016-048, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    7. Keller, Godfrey & Rady, Sven, 2015. "Breakdowns," Theoretical Economics, Econometric Society, vol. 10(1), January.
    8. Moscarini, Giuseppe & Squintani, Francesco, 2010. "Competitive experimentation with private information: The survivor's curse," Journal of Economic Theory, Elsevier, vol. 145(2), pages 639-660, March.
    9. Dan Bernhardt & Bart Taub, 2015. "Learning about common and private values in oligopoly," RAND Journal of Economics, RAND Corporation, vol. 46(1), pages 66-85, March.
    10. Keller, Godfrey & Rady, Sven, 2015. "Undiscounted Bandit Games," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 520, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    11. Dirk Bergemann & Juuso Valimaki, 2004. "Monopoly Pricing of Experience Goods," Cowles Foundation Discussion Papers 1463R, Cowles Foundation for Research in Economics, Yale University, revised May 2005.
    12. repec:spr:jogath:v:46:y:2017:i:1:d:10.1007_s00182-016-0531-0 is not listed on IDEAS
    13. Ruben van de Geer & Arnoud V. den Boer & Christopher Bayliss & Christine Currie & Andria Ellina & Malte Esders & Alwin Haensel & Xiao Lei & Kyle D. S. Maclean & Antonio Martinez-Sykora & Asbj{o}rn Nil, 2018. "Dynamic Pricing and Learning with Competition: Insights from the Dynamic Pricing Challenge at the 2017 INFORMS RM & Pricing Conference," Papers 1804.03219, arXiv.org.

    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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