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Demand and Supply in New Markets: Diffusion with Bilateral Learning

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  • Vettas, Nikolaos

Abstract

This paper explores the endogenous joint evolution of demand and supply in new markets. Firms and consumers learn, in a Bayesian fashion, by observing the behavior of other firms and consumers, respectively. As a result, endogenous information diffusion takes place on both sides of the market. In equilibrium, entry occurs in waves and its level depends on two distinct informational effects. The model identifies an externality which provides a natural explanation for S-shaped diffusion paths: entry reveals information to the consumers about the value of the new product, and thus early waves of entry affect the expected profitability of subsequent entry.

Suggested Citation

  • Vettas, Nikolaos, 1996. "Demand and Supply in New Markets: Diffusion with Bilateral Learning," Working Papers 96-15, Duke University, Department of Economics.
  • Handle: RePEc:duk:dukeec:96-15
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    References listed on IDEAS

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    1. Novshek, William & Sonnenschein, Hugo, 1987. "General Equilibrium with Free Entry: A Synthetic Approach to the Theory of Perfect Competition," Journal of Economic Literature, American Economic Association, vol. 25(3), pages 1281-1306, September.
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    Citations

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    Cited by:

    1. Navarro, Noemí, 2012. "Price and quality decisions under network effects," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 263-270.
    2. Rafael Rob & Nikolaos Vettas, 2003. "Foreign Direct Investment and Exports with Growing Demand," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 629-648.
    3. Kosfeld, Michael, 2005. "Rumours and markets," Journal of Mathematical Economics, Elsevier, vol. 41(6), pages 646-664, September.
    4. Kotseva, Rossitsa & Vettas, Nikolaos, 2005. "Foreign Direct Investment and Exports Dynamics with Demand Learning," CEPR Discussion Papers 5262, C.E.P.R. Discussion Papers.
    5. Geroski, P. A., 2000. "Models of technology diffusion," Research Policy, Elsevier, vol. 29(4-5), pages 603-625, April.
    6. Chia-Hui Chen & Junichiro Ishida, 2017. "A War of Attrition with Experimenting Players," ISER Discussion Paper 1014, Institute of Social and Economic Research, Osaka University.
    7. Rigotti, Luca & Ryan, Matthew & Vaithianathan, Rema, 2001. "Entrepreneurial Innovation," Department of Economics, Working Paper Series qt508109h4, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    8. Henk Folmer & Auke Leen, 2013. "Why do successful restaurants not raise their prices?," Letters in Spatial and Resource Sciences, Springer, vol. 6(2), pages 81-90, July.
    9. J. Miguel Villas-Boas, 2000. "Competing with Experience Goods," Econometric Society World Congress 2000 Contributed Papers 0771, Econometric Society.
    10. Rixen, Martin & Weigand, Jürgen, 2014. "Agent-based simulation of policy induced diffusion of smart meters," Technological Forecasting and Social Change, Elsevier, vol. 85(C), pages 153-167.
    11. Roe, Brian E. & Teisl, Mario F., 2004. "Consumption Externalities, Information Policies, And Multiple Equilibria: Evidence For Genetically Engineered Food Markets," 2004 Annual meeting, August 1-4, Denver, CO 20243, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    12. Kitamura, Hiroshi & Miyaoka, Akira & Sato, Misato, 2013. "Free entry, market diffusion, and social inefficiency with endogenously growing demand," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 98-116.

    More about this item

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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