Just Starting Out: Learning and Equilibrium in a New Market

Ulrich Doraszelski, Gregory Lewis and Ariel Pakes

American Economic Review, 2018, vol. 108, issue 3, 565-615

Abstract: We document the evolution of the new market for frequency response within the UK electricity system over a six-year period. Firms competed in price while facing considerable initial uncertainty about demand and rival behavior. We show that prices stabilized over time, converging to a rest point that is consistent with equilibrium play. We draw on models of fictitious play and adaptive learning to analyze how this convergence occurs and show that these models predict behavior better than an equilibrium model prior to convergence.

JEL-codes: D22 D83 L13 L94 L98 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/aer.20160177
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Citations: View citations in EconPapers (37)

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Working Paper: Just Starting Out: Learning and Equilibrium in a New Market (2016)
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