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Learning and strategic pricing

Record type: Article

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.

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Citation

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

More information

Published date: 1996

Identifiers

Local EPrints ID: 33058
URI: http://eprints.soton.ac.uk/id/eprint/33058
ISSN: 0012-9682
PURE UUID: 32afae19-0e34-4a2b-a2e2-1192a8e395b4

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Date deposited: 20 Dec 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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