Market Experimentation in a Dynamic Differentiated-Goods Duopoly
We study the evolution of prices in a symmetric duopoly where firms are uncertain about the degree of product differentiation. Customers sometimes perceive the products as close substitutes, sometimes as highly differentiated. Firms learn about their competitive environment from the quantities sold and a background signal. As the information of the market outcomes increases with the price differential, there is scope for active learning. In a setting with linear demand curves, we derive firms' pricing strategies as payoff-symmetric mixed or correlated Markov perfect equilibria of a stochastic differential game where the common posterior belief is the natural state variable. When information has low value, firms charge the same price as would be set by myopic players, and there is no price dispersion. When firms value information more highly, on the other hand, they actively learn by creating price dispersion. This market experimentation is transient, and most likely to be observed when the firms' environment changes sufficiently often, but not too frequently.
|Date of creation:||Jul 1999|
|Contact details of provider:|| Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Dirk Bergemann & Juuso Valimaki, 1996. "Market Experimentation and Pricing," Cowles Foundation Discussion Papers 1122, Cowles Foundation for Research in Economics, Yale University.
- Godfrey Keller & Sven Rady, 1997.
"Optimal Experimentation in a Changing Environment,"
STICERD - Theoretical Economics Paper Series
333, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
- Mirman,Leonard & Samuelson,Larry & Urbano,Amparo, .
"Duopoly signal jamming,"
Discussion Paper Serie B
199, University of Bonn, Germany.
- Mirman Leonard J. & Samuelson Larry & Schlee Edward E., 1994.
"Strategic Information Manipulation in Duopolies,"
Journal of Economic Theory,
Elsevier, vol. 62(2), pages 363-384, April.
- Mirman, L.J. & Samuelson, L. & Schlee, E.E., 1991. "Strategic Information Manupulation in Duopolies," Papers 9137, Tilburg - Center for Economic Research.
- Mirman, L.J. & Samuelson, L. & Schlee, E.E., 1991. "Strategic information manipulation in duopolies," Discussion Paper 1991-37, Tilburg University, Center for Economic Research.
- Mirman, L.J. & Samuelson, L. & Schlee, E.E., 1992. "Strategic Information Manipulation in Duopolies," Working papers 9210, Wisconsin Madison - Social Systems.
- Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
- Aghion, Philippe & Espinosa, Maria Paz & Jullien, Bruno, 1993.
"Dynamic Duopoly with Learning through Market Experimentation,"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(3), pages 517-539, July.
- Aghion, P. & Espinoza, M.P. & Jullien, B., 1990. "Dynamic Duopoly With Learning Through Market Experimentation," DELTA Working Papers 90-13, DELTA (Ecole normale supérieure).
- Jullien Bruno & Aghion Philippe & Paz Espinoza M, 1990. "Dynamic duopoly with learning through market experimentation," CEPREMAP Working Papers (Couverture Orange) 9012, CEPREMAP.
- Arthur Fishman & Rafael Rob, .
"Experimentation and Competition,"
Penn CARESS Working Papers
b530e9a0ad08e45aeff62efaf, Penn Economics Department.
- Gale, D. & Chamley, C., 1992.
"Information Revelation and Strategic Delay in a Model of Investment,"
10, Boston University - Department of Economics.
- Chamley, Christophe & Gale, Douglas, 1994. "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, Econometric Society, vol. 62(5), pages 1065-1085, September.
- Michael H. Riordan, 1985. "Imperfect Information and Dynamic Conjectural Variations," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 41-50, Spring.
- Harris, C., 1993.
"Generalized Solutions of Stochastic Differential Games in One Dimension,"
44, Boston University - Industry Studies Programme.
- Christopher Harris, 1993. "Generalized Solutions of Stochastic Differential Games in One Dimension," Papers 0044, Boston University - Industry Studies Programme.
- Andrew Caplin & John Leahy, 1993. "Sectoral Shocks, Learning, and Aggregate Fluctuations," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 777-794.
- Slade, Margaret E, 1989. "Price Wars in Price-Setting Supergames," Economica, London School of Economics and Political Science, vol. 56(223), pages 295-310, August.
- Dirk Bergemann & Juuso Valimaki, 1996.
"Market Diffusion with Two-Sided Learning,"
Cowles Foundation Discussion Papers
1138, Cowles Foundation for Research in Economics, Yale University.
- Peter Diamond, 1985.
"Consumer Differences and Prices in a Search Model,"
404, Massachusetts Institute of Technology (MIT), Department of Economics.
- Felli, Leonardo & Harris, Christopher, 1996. "Learning, Wage Dynamics, and Firm-Specific Human Capital," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 838-868, August.
- Harrington Jr. , Joseph E., 1995. "Experimentation and Learning in a Differentiated-Products Duopoly," Journal of Economic Theory, Elsevier, vol. 66(1), pages 275-288, June.
- Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
- Burdett, Kenneth & Coles, Melvyn G., 1997. "Steady State Price Distributions in a Noisy Search Equilibrium," Journal of Economic Theory, Elsevier, vol. 72(1), pages 1-32, January.
- Steven Salop & Joseph Stiglitz, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 493-510.
- 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.
- Reinganum, Jennifer F, 1979.
"A Simple Model of Equilibrium Price Dispersion,"
Journal of Political Economy,
University of Chicago Press, vol. 87(4), pages 851-858, August.
- Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
- Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 655-675.
When requesting a correction, please mention this item's handle: RePEc:cep:stitep:369. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.