Learning and strategic pricing


Bergemann, Dirk and Valimaki, Juuso (1996) Learning and strategic pricing. Econometrica, 64, (5), 1125-1149.

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Description/Abstract

We consider the situation where a single consumer buys a stream of goods from different sellers over time. The true value of each seller's product to the buyer is initially unknown. Additional information can be gained only by experimentation. For exogeneously given prices the buyer's problem is a multi-armed bandit problem. The innovation in this paper is to endogenize the cost of experimentation to the consumer by allowing for price competition between the sellers. The role of prices is then to allocate intertemporally the costs and benefits of learning between buyers and sellers. We examine how strategic aspects of the oligopoly model interact with the learning process. All Markov perfect equilibria (MPE) are efficient. We identify an equilibrium which besides its unique robustness properties has a strikingly simple, seemingly myopic pricing rule. Prices below marginal cost emerge naturally to sustain experimentation. Intertemporal exchange of the gains of learning is necessary to support efficient experimentation. We analyze the asymptotic behavior of the equilibria.

Item Type: Article
ISSNs: 0012-9682 (print)
Related URLs:
Subjects: H Social Sciences > HB Economic Theory
Divisions: University Structure - Pre August 2011 > School of Social Sciences > Economics
ePrint ID: 33058
Date Deposited: 20 Dec 2006
Last Modified: 27 Mar 2014 18:20
URI: http://eprints.soton.ac.uk/id/eprint/33058

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