IDEAS home Printed from https://ideas.repec.org/p/cwl/cwldpp/1113.html
   My bibliography  Save this paper

Learning and Strategic Pricing

Author

Listed:

Abstract

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.

Suggested Citation

  • Dirk Bergemann & Juuso Valimaki, 1996. "Learning and Strategic Pricing," Cowles Foundation Discussion Papers 1113, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1113
    as

    Download full text from publisher

    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d11/d1113.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bertola, Giuseppe & Felli, Leonardo, 1993. "Job matching and the distribution of producer surplus," Ricerche Economiche, Elsevier, vol. 47(1), pages 65-92, March.
    2. 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.
    3. 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.
    4. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
    5. Bergemann, Dirk & Valimaki, Juuso, 1996. "Learning and Strategic Pricing," Econometrica, Econometric Society, vol. 64(5), pages 1125-1149, September.
    6. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
    7. 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.
    8. Miller, Robert A, 1984. "Job Matching and Occupational Choice," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 1086-1120, December.
    9. Banks, Jeffrey S & Sundaram, Rangarajan K, 1992. "Denumerable-Armed Bandits," Econometrica, Econometric Society, vol. 60(5), pages 1071-1096, September.
    10. Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 655-675.
    11. Eric Maskin & Jean Tirole, 1985. "A Theory of Dynamic Oligopoly, II: Price Competition," Working papers 373, Massachusetts Institute of Technology (MIT), Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fishman, Arthur & Rob, Rafael, 1998. "Experimentation and Competition," Journal of Economic Theory, Elsevier, vol. 78(2), pages 299-320, February.
    2. Dirk Bergemann & Juuso Valimaki, 1996. "Market Experimentation and Pricing," Cowles Foundation Discussion Papers 1122, Cowles Foundation for Research in Economics, Yale University.
    3. Klimenko, Mikhail M., 2004. "Industrial targeting, experimentation and long-run specialization," Journal of Development Economics, Elsevier, vol. 73(1), pages 75-105, February.
    4. Heski Bar-Isaac, 2001. "Self-Confidence and Survival," FMG Discussion Papers dp395, Financial Markets Group.
    5. Vives, Xavier, 1997. "Learning from Others: A Welfare Analysis," Games and Economic Behavior, Elsevier, vol. 20(2), pages 177-200, August.
    6. Bergemann, Dirk & Valimaki, Juuso, 2002. "Entry and Vertical Differentiation," Journal of Economic Theory, Elsevier, vol. 106(1), pages 91-125, September.
    7. Dirk Bergemann & Juuso Välimäki, 2000. "Experimentation in Markets," Review of Economic Studies, Oxford University Press, vol. 67(2), pages 213-234.
    8. Elena Pastorino, 2004. "Optimal Job Design and Career Dynamics in the Presence of Uncertainty," Econometric Society 2004 North American Summer Meetings 292, Econometric Society.
    9. Bolton, P. & Harris, C., 1996. "Strategic Experimentation : A Revision," Other publications TiSEM 2cd2755d-6931-488f-948e-5, Tilburg University, School of Economics and Management.
    10. Bolton, P. & Harris, C., 1996. "Strategic Experimentation : A Revision," Discussion Paper 1996-27, Tilburg University, Center for Economic Research.
    11. Chen, Yi, 2020. "A revision game of experimentation on a common threshold," Journal of Economic Theory, Elsevier, vol. 186(C).
    12. Godfrey Keller & Sven Rady, 1998. "Market Experimentation in a Dynamic Differentiated-Goods Duopoly," Game Theory and Information 9810001, University Library of Munich, Germany, revised 20 Aug 1999.
    13. Hu, Yingyao & Kayaba, Yutaka & Shum, Matthew, 2013. "Nonparametric learning rules from bandit experiments: The eyes have it!," Games and Economic Behavior, Elsevier, vol. 81(C), pages 215-231.
    14. Sorensen, Morten, 2007. "Learning by Investing: Evidence from Venture Capital," SIFR Research Report Series 53, Institute for Financial Research.
    15. Shaun Larcom & Ferdinand Rauch & Tim Willems, 2017. "The Benefits of Forced Experimentation: Striking Evidence from the London Underground Network," The Quarterly Journal of Economics, Oxford University Press, vol. 132(4), pages 2019-2055.
    16. John Robst & Kimmarie McGOLDRICK, 1999. "The Measurement of Firm Information About Product Demand," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 15(2), pages 149-163, September.
    17. Umberto Garfagnini & Bruno Strulovici, 2012. "Social Learning and Innovation Cycles (revision of DP#1516, The Dynamics of Innovation)," Discussion Papers 1546, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    18. Felli, Leonardo & Harris, Christopher, 2018. "Firm-specific training," Journal of Economic Theory, Elsevier, vol. 175(C), pages 585-623.
    19. Krahmer, Daniel, 2003. "Entry and experimentation in oligopolistic markets for experience goods," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1201-1213, October.
    20. Kate Antonovics & Limor Golan, 2012. "Experimentation and Job Choice," Journal of Labor Economics, University of Chicago Press, vol. 30(2), pages 333-366.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:1113. 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: . General contact details of provider: https://edirc.repec.org/data/cowleus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Brittany Ladd (email available below). General contact details of provider: https://edirc.repec.org/data/cowleus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.