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Strategic Experimentation with Poisson Bandits

Author

Listed:
  • Sven Rady

    (University of Munich)

  • Godfrey Keller

    (University of Oxford)

Abstract

This paper studies a game of strategic experimentation with two-armed bandits where the risky arm distributes lump-sum payoffs according to a Poisson process. The intensity of this process is either high or low, and unknown to the players. We consider Markov perfect equilibria with beliefs as the state variable. There is no equilibrium where all players use cut-off strategies, and all equilibria exhibit an `encouragement effect' relative to the single-agent optimum. The fact that a success on the risky arm is not fully revealing limits the payoff asymmetry as well as the inefficiency of asymmetric equilibria. We construct the unique symmetric MPE and, for a sufficiently high difference between the two possible intensities, an asymmetric equilibrium that dominates the symmetric one in terms of aggregate payoffs.

Suggested Citation

  • Sven Rady & Godfrey Keller, 2007. "Strategic Experimentation with Poisson Bandits," 2007 Meeting Papers 332, Society for Economic Dynamics.
    • Handle: RePEc:red:sed007:332
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    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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