Learning and Strategic Pricing
We consider the situation where a single consumer buys a stream of goods from different sellers over time. The true value of each seller's product to the buyer is initially unknown. Additional information can be gained only by experimentation. For exogenously given prices the buyer's problem is a multi-armed bandit problem. The innovation in this paper is to endogenize the cost of experimentation to the consumer by allowing for price competition between the sellers. The role of prices is then to allocate intertemporally the costs and benefits of learning between buyer and sellers. We examine how strategic aspects of the oligopoly model interact with the learning process. All Markov Perfect Equilibria (MPE) are efficient. We identify an equilibrium which besides its unique robustness properties has a strikingly simple, seemingly myopic pricing rule. Prices below marginal cost emerge naturally to sustain experimentation. Intertemporal exchange of the gains of learning is necessary to support efficient experimentation. We analyze the asymptotic behavior of the equilibria.
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References listed on IDEAS
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- Philippe Aghion & Patrick Bolton & Christopher Harris & Bruno Jullien, 1991.
"Optimal Learning by Experimentation,"
Review of Economic Studies,
Oxford University Press, vol. 58(4), pages 621-654.
- Aghion, P. & Bolton, P. & Harris, C. & Jullien, B., 1990. "Optimal Learning By Experimentation," DELTA Working Papers 90-10, DELTA (Ecole normale supérieure).
- Aghion Philippe & Bolton, Patrick & Harris Christopher & Jullien Bruno, 1991. "Optimal learning by experimentation," CEPREMAP Working Papers (Couverture Orange) 9104, CEPREMAP.
- Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
- Bergemann, Dirk & Valimaki, Juuso, 1996. "Learning and Strategic Pricing," Econometrica, Econometric Society, vol. 64(5), pages 1125-1149, September.
- Dirk Bergemann & Juuso Valimaki, 1996. "Learning and Strategic Pricing," Cowles Foundation Discussion Papers 1113, Cowles Foundation for Research in Economics, Yale University.
- Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
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- Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-990, October.
- Thomas Sargent, "undated". "Matlab code for Jovanovic's matching model," QM&RBC Codes 24, Quantitative Macroeconomics & Real Business Cycles.
- 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.
- Banks, Jeffrey S & Sundaram, Rangarajan K, 1992. "Denumerable-Armed Bandits," Econometrica, Econometric Society, vol. 60(5), pages 1071-1096, September.
- Banks, J.s. & Sunderam, R.K., 1991. "Denumerable-Armed Bandits," RCER Working Papers 277, University of Rochester - Center for Economic Research (RCER).
- Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 655-675. Full references (including those not matched with items on IDEAS)
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