Experimenting to Learn about Demand in Duopoly with Forward‐Looking Consumers

Francisco Ruiz‐Aliseda
Authors registered in the RePEc Author Service: Francisco Ruiz-Aliseda

Journal of Industrial Economics, 2019, vol. 67, issue 2, 279-327

Abstract: Using a two‐period model, I show that competition between two symmetric duopolists trying to learn about unknown features of demand results in an informationally suboptimal process. Because a firm’s marginal return to price experimentation equals zero if the rival’s price is matched in the first period, myopic symmetric pricing arises in equilibrium even though a firm’s expected second‐period profit attains a local minimum. Furthermore, forward‐looking consumers suffer from ratcheting because their first‐period purchase decisions partly reveal their preferences, which exacerbates the informational suboptimality of the firms’ experimentation process without affecting their pricing. The role of firm asymmetries is also analyzed.

Date: 2019
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