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Strategic experimentation with Poisson bandits

  • Rady, Sven

    ()

    (Department of Economics, University of Munich)

  • Keller, Godfrey

    ()

    (Department of Economics, University of Oxford)

We study a game of strategic experimentation with two-armed bandits where the risky arm distributes lump-sum payoffs according to a Poisson process. Its intensity is either high or low, and unknown to the players. We consider Markov perfect equilibria with beliefs as the state variable and show that all such equilibria exhibit an 'encouragement effect' relative to the single-agent optimum. There is no equilibrium in which all players use cut-off strategies. Owing to the encouragement effect, asymmetric equilibria in which players take turns playing the risky arm before all experimentation stops Pareto dominate the unique symmetric equilibrium. Rewarding the last experimenter with a higher continuation value increases the range of beliefs where players experiment, but may reduce the intensity of experimentation at more optimistic beliefs. This suggests that there is no equilibrium that uniformly maximizes the players' average payoff.

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Article provided by Econometric Society in its journal Theoretical Economics.

Volume (Year): 5 (2010)
Issue (Month): 2 (May)
Pages:

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Handle: RePEc:the:publsh:595
Contact details of provider: Web page: http://econtheory.org

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  1. Decamps, Jean-Paul & Mariotti, Thomas, 2004. "Investment timing and learning externalities," Journal of Economic Theory, Elsevier, vol. 118(1), pages 80-102, September.
  2. Dirk Bergemann & Juuso Valimaki, 2006. "Bandit Problems," Cowles Foundation Discussion Papers 1551, Cowles Foundation for Research in Economics, Yale University.
  3. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
  4. Cripps, Martin William & Keller, R Godfrey & Rady, Sven, 2003. "Strategic Experimentation with Exponential Bandits," CEPR Discussion Papers 3814, C.E.P.R. Discussion Papers.
  5. Guiseppe Moscarini & Francesco Squintani, 2004. "Competitive Experimentation with Private Information," Cowles Foundation Discussion Papers 1489, Cowles Foundation for Research in Economics, Yale University.
  6. repec:cup:cbooks:9780521497695 is not listed on IDEAS
  7. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
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