Market Experimentation and Pricing
We present a continuous-time model of Bayesian learning in a duopolistic market. Initially the value of one product offered is unknown to the market. The market participants learn more about the true value of the product as experimentation occurs over time. Firms set prices to induce experimentation with their product. The aggregate outcomes are public information. As agents learn from the experiments of others, informational externalities arise. Surprisingly, the informational externality leads to too much learning. Buyers do not consider the impact of their experimentation on other buyers while the sellers internalize the gains from experiments conducted by the buyers. The firms free ride on the market as the social costs of experiments are not appropriately reflected in the equilibrium prices. The value functions of the sellers display preference for information in contrast to the buyers who are information averse. We determine Markov Perfect Equilibrium prices and allocations in this two-sided learning model. The analysis is presented for a finite number of buyers as well as for a continuum of buyers. The severity of the inefficiency is shown to be monotonically increasing in the number of buyers.
|Date of creation:||Apr 1996|
|Contact details of provider:|| Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA|
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.yale.edu/
More information through EDIRC
|Order Information:|| Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA|
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.:
- Joseph Farrell & Garth Saloner, 1985.
"Standardization, Compatibility, and Innovation,"
RAND Journal of Economics,
The RAND Corporation, vol. 16(1), pages 70-83, Spring.
- 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.
- Jullien Bruno & Aghion Philippe & Paz Espinoza M, 1990. "Dynamic duopoly with learning through market experimentation," CEPREMAP Working Papers (Couverture Orange) 9012, CEPREMAP.
- Aghion, P. & Espinoza, M.P. & Jullien, B., 1990. "Dynamic Duopoly With Learning Through Market Experimentation," DELTA Working Papers 90-13, DELTA (Ecole normale supérieure).
- Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-841, August.
- Bertola, Giuseppe & Felli, Leonardo, 1993. "Job matching and the distribution of producer surplus," Ricerche Economiche, Elsevier, vol. 47(1), pages 65-92, March.
- Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 655-675.
- Chamley, Christophe & Gale, Douglas, 1994.
"Information Revelation and Strategic Delay in a Model of Investment,"
Econometric Society, vol. 62(5), pages 1065-1085, September.
- Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
- Bergemann, Dirk & Valimaki, Juuso, 1996.
"Learning and Strategic Pricing,"
Econometric Society, vol. 64(5), pages 1125-1149, September.
- Dirk Bergemann & Juuso Valimaki, 1997.
"Market Diffusion with Two-Sided Learning,"
RAND Journal of Economics,
The RAND Corporation, vol. 28(4), pages 773-795, Winter.
- Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
- Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:1122. 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: (Matthew C. Regan)
If references are entirely missing, you can add them using this form.