Market Experimentation in a Dynamic Differentiated-Goods Duopoly
We study the evolution of prices in a symmetric duopoly where firms are uncertain about the degree of product differentiation. Customers sometimes perceive the products as close substitutes, sometimes as highly differentiated. Firms learn about their competitive environment from the quantities sold and a background signal. As the informativeness of the market outcome increases with the price differential, there is scope for active learning. In a setting with linear demand curves, we derive firms' pricing strategies as payoff-symmetric mixed or correlated Markov perfect equilibria of a stochastic differential game where the common posterior belief is the natural state variable. When information has low value, firms charge the same price as would be set by myopic players, and there is no price dispersion. When firms value information more highly, on the other hand, they actively learn by creating price dispersion. This market experimentation is transient, and most likely to be observed when the firms' environment changes sufficiently often, but not too frequently.
|Date of creation:||16 Oct 1998|
|Date of revision:||20 Aug 1999|
|Note:||Type of Document - Acrobat PDF; prepared on PC; pages: 37 ; figures: included|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
References listed on IDEAS
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.:
- Aghion, Philippe & Espinosa, Maria Paz & Jullien, Bruno, 1993.
"Dynamic Duopoly with Learning through Market Experimentation,"
Springer, vol. 3(3), pages 517-39, 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).
- repec:att:wimass:9206 is not listed on IDEAS
- Arthur Fishman & Rafael Rob, .
""Experimentation and Competition'',"
CARESS Working Papres
97-12, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
- Burdett, Kenneth & Coles, Melvyn G., 1997.
"Steady State Price Distributions in a Noisy Search Equilibrium,"
Journal of Economic Theory,
Elsevier, vol. 72(1), pages 1-32, January.
- Kenneth Burdett and Melvyn G. Coles, . "Steady State Price Distributions in a Noisy Search Equilibrium," Economics Discussion Papers 450, University of Essex, Department of Economics.
- Godfrey Keller & Sven Rady, 1997.
"Optimal Experimentation in a Changing Environment,"
STICERD - Theoretical Economics Paper Series
333, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
- Harrington Jr. , Joseph E., 1995. "Experimentation and Learning in a Differentiated-Products Duopoly," Journal of Economic Theory, Elsevier, vol. 66(1), pages 275-288, June.
- repec:tpr:qjecon:v:102:y:1987:i:2:p:429-36 is not listed on IDEAS
- Steven C. Salop & Joseph E. Stiglitz, 1977.
"Bargains and ripoffs: a model of monopolistically competitive price dispersion,"
Special Studies Papers
94, Board of Governors of the Federal Reserve System (U.S.).
- Salop, Steven & Stiglitz, Joseph E, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 493-510, October.
- Michael H. Riordan, 1985. "Imperfect Information and Dynamic Conjectural Variations," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 41-50, Spring.
- Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
- Mirman, Leonard J & Samuelson, Larry & Urbano, Amparo, 1993.
"Duopoly Signal Jamming,"
Springer, vol. 3(1), pages 129-49, January.
- repec:att:wimass:9210 is not listed on IDEAS
- Mirman, L.J. & Samuelson, L. & Schlee, E.E., 1991.
"Strategic information manipulation in duopolies,"
1991-37, Tilburg University, Center for Economic Research.
- Dirk Bergemann & Juuso Valimaki, 1996.
"Market Diffusion with Two-Sided Learning,"
Cowles Foundation Discussion Papers
1138, Cowles Foundation for Research in Economics, Yale University.
- Reinganum, Jennifer F, 1979.
"A Simple Model of Equilibrium Price Dispersion,"
Journal of Political Economy,
University of Chicago Press, vol. 87(4), pages 851-58, August.
- Dirk Bergemann & Juuso Valimaki, 1996. "Market Experimentation and Pricing," Cowles Foundation Discussion Papers 1122, Cowles Foundation for Research in Economics, Yale University.
- Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 655-75, July.
- Slade, Margaret E, 1989. "Price Wars in Price-Setting Supergames," Economica, London School of Economics and Political Science, vol. 56(223), pages 295-310, August.
- Harris, C., 1993.
"Generalized Solutions of Stochastic Differential Games in One Dimension,"
44, Boston University - Industry Studies Programme.
- Christopher Harris, 1993. "Generalized Solutions of Stochastic Differential Games in One Dimension," Papers 0044, Boston University - Industry Studies Programme.
- Gale, D. & Chamley, C., 1992.
"Information Revelation and Strategic Delay in a Model of Investment,"
10, Boston University - Department of Economics.
- Chamley, Christophe & Gale, Douglas, 1994. "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, Econometric Society, vol. 62(5), pages 1065-85, September.
- Felli, Leonardo & Harris, Christopher, 1996. "Learning, Wage Dynamics, and Firm-Specific Human Capital," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 838-68, August.
- Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
- Peter Diamond, 1985.
"Consumer Differences and Prices in a Search Model,"
404, Massachusetts Institute of Technology (MIT), Department of Economics.
- Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
- McLennan, Andrew, 1984. "Price dispersion and incomplete learning in the long run," Journal of Economic Dynamics and Control, Elsevier, vol. 7(3), pages 331-347, September.
- Caplin, Andrew & Leahy, John V, 1993. "Sectoral Shocks, Learning, and Aggregate Fluctuations," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 777-94, October.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpga:9810001. 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: (EconWPA)
If references are entirely missing, you can add them using this form.