Adaptive Learning Models of Consumer Behaviour

Ed Hopkins

Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

Abstract: This paper applies recent advances in the theory of learning to the analysis of consumer behaviour in a dynamic duopoly. Nash equilibrium play is characterized when consumers learn adaptively about the relative quality of the two products. A contrast is made between belief-based and reinforcement learning. Under reinforcement learning, consumers can become locked into the habit of purchasing inferior goods. Such lock-in permits the existence of multiple history-dependent asymmetric steady states in which one firm dominates. In contrast, belief-based learning rules must lead asymptotically to correct beliefs about the relative quality of the two brands and so in this case there is a unique steady state. However, if consumers' initial estimate of the firm's quality is high (low), a firm has an incentive to charge above (below) the mytopic duopoly price in order to slow (speed up) learning.

Keywords: learning; consumer behavior; dynamic pricing; behavioral economics; reinforcement learning; market structure (search for similar items in EconPapers)
JEL-codes: D11 D83 L12 M31 (search for similar items in EconPapers)
Pages: 26
Date: 2004-11, Revised 2004-11
New Economics Papers: this item is included in nep-mic
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Downloads: (external link)
http://www.econ.ed.ac.uk/papers/id121_esedps.pdf Revised version, Novembr 2004 (application/pdf)
http://www.econ.ed.ac.uk/papers/id80_esedps.pdf First version, February 2002 (application/pdf)

Related works:
Working Paper: Adaptive Learning Models of Consumer Behaviour (2010)
Journal Article: Adaptive learning models of consumer behavior (2007)
Working Paper: Adaptive Learning Models of Consumer Behaviour (2006)
Working Paper: Adaptive Learning Models of Consumer Behaviour (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:esedps:121

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