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Adaptive Learning Models of Consumer Behaviour

  • Ed Hopkins

In a model of dynamic duopoly, optimal price policies are characterized assuming consumers learn adaptively about the relative quality of the two products. A contrast is made between belief-based and reinforcement learning. Under reinforcement learning, consumers can become locked into the habit of purchasing inferior goods. Such lock-in permits the existence of multiple history-dependent asymmetric steady states in which one firm dominates. In contrast, belief-based learning rules must lead asymptotically to correct beliefs about the relative quality of the two brands and so in this case there is a unique steady state.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 506439000000000346.

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Date of creation: 11 Dec 2010
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Handle: RePEc:cla:levarc:506439000000000346
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