Strategic Experimentation with Poisson Bandits
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.
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- Dirk Bergemann & Juuso Valimaki, 2006. "Bandit Problems," Cowles Foundation Discussion Papers 1551, Cowles Foundation for Research in Economics, Yale University.
- Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
- Godfrey Keller & Sven Rady & Martin Cripps, 2005.
"Strategic Experimentation with Exponential Bandits,"
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- Cripps, Martin William & Keller, R Godfrey & Rady, Sven, 2003. "Strategic Experimentation with Exponential Bandits," CEPR Discussion Papers 3814, C.E.P.R. Discussion Papers.
- Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
- Decamps, Jean-Paul & Mariotti, Thomas, 2004. "Investment timing and learning externalities," Journal of Economic Theory, Elsevier, vol. 118(1), pages 80-102, September.
- Guiseppe Moscarini & Francesco Squintani, 2004. "Competitive Experimentation with Private Information," Cowles Foundation Discussion Papers 1489, Cowles Foundation for Research in Economics, Yale University.
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