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Adaptive Learning Models of Consumer Behaviour

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This paper applies recent advances in the theory of learning to the analysis of consumer behaviour in a dynamic duopoly. Nash equilibrium play is characterized when 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. However, if consumers' initial estimate of the firm's quality is high (low), a firm has an incentive to charge above (below) the mytopic duopoly price in order to slow (speed up) learning.

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File URL: http://www.econ.ed.ac.uk/papers/id121_esedps.pdf
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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 121.

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Length: 26
Date of creation: Nov 2004
Handle: RePEc:edn:esedps:121
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