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Experimentation in markets

Experimentation in markets
Experimentation in markets
We present a model of entry and exit with Bayesian learning and price competition. A new product of initially unknown quality is introduced in the market, and purchases of the product yield information on its true quality. We assume that the performance of the new product is publicly observable. As agents learn from the experiments of others, informational externalities arise.
We determine the Markov Perfect Equilibrium prices and allocations. In a single market, the combination of the informational externalities among the buyers and the strategic pricing by the sellers results in excessive experimentation. If the new product is launched in many distinct markets, the path of sales converges to the efficient path in the limit as the number of markets grows
0034-6527
213-234
Bergemann, Dirk
436929ea-1d3f-48d5-bf4f-08ef4a2d74b4
Valimaki, Juuso
6cb468e1-96a7-4632-8db2-906714498ce2
Bergemann, Dirk
436929ea-1d3f-48d5-bf4f-08ef4a2d74b4
Valimaki, Juuso
6cb468e1-96a7-4632-8db2-906714498ce2

Bergemann, Dirk and Valimaki, Juuso (2000) Experimentation in markets. The Review of Economic Studies, 67 (2), 213-234.

Record type: Article

Abstract

We present a model of entry and exit with Bayesian learning and price competition. A new product of initially unknown quality is introduced in the market, and purchases of the product yield information on its true quality. We assume that the performance of the new product is publicly observable. As agents learn from the experiments of others, informational externalities arise.
We determine the Markov Perfect Equilibrium prices and allocations. In a single market, the combination of the informational externalities among the buyers and the strategic pricing by the sellers results in excessive experimentation. If the new product is launched in many distinct markets, the path of sales converges to the efficient path in the limit as the number of markets grows

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More information

Published date: 2000
Organisations: Economics

Identifiers

Local EPrints ID: 33056
URI: https://eprints.soton.ac.uk/id/eprint/33056
ISSN: 0034-6527
PURE UUID: 3e1dc78f-9f1c-4279-b09b-a182cc2db313

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Date deposited: 19 Jul 2006
Last modified: 17 Jul 2017 15:54

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Contributors

Author: Dirk Bergemann
Author: Juuso Valimaki

University divisions

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